Some positive things are happening in Snap’s business that could make its stock a great long-term buy.
Snap (SNAP -0.79%) is the parent company of social media platform Snapchat. Its stock has been an underperformer since late 2021, crashing along with much of the tech sector around that time. It’s down 47% so far in 2024 as investors appear unhappy with the company’s modest revenue growth (relative to its peers) and its ongoing losses.
The company’s business has had an added issue to manage since 2021 thanks to Apple changing its privacy policies for apps available on its devices. The change made it harder for application developers within its ecosystem to track their users across the internet. That meant social media platforms like Snapchat had a much tougher time selling highly targeted advertising slots.
Solving that problem remains challenging, but Snap is finding ways to innovate and is making clear progress. There’s also a key reason Snap’s business could thrive again. Here’s why the drop in its stock this year could be a long-term buying opportunity.
Snap continues to innovate
As is the case with most social media platforms, advertising is the primary source of Snap’s revenue. The company continues to come up with creative ways to improve the return on advertising spend (ROAS) for businesses, with a combination of innovative new concepts.
For example, the company launched its 7/0 Optimization model last year. It assigns a seven-day learning period to each new campaign, with the budget calculated from scratch, based on the results. In other words, the model doesn’t make assumptions based on past ad spending or outcomes but is entirely performance-driven. That can improve cost efficiency. During the second quarter of 2024 (ended June 30), some gaming companies, like Roblox, experienced a 30% to 50% increase in their ROAS with the help of 7/0 Optimization.
Snap also offers a tool called Conversions API that saw 300% growth in adoption during Q2, compared to the year-ago period. This is a direct solution to Apple’s privacy changes because it doesn’t rely on web-based cookies to track user activity.
Instead, advertisers can connect their servers directly to Snap’s servers to exchange data, which bypasses Apple’s restrictions entirely. That means Snap gets first-hand data on the purchase patterns of its users and knows exactly which ads generated sales. This will dramatically improve targeting over time.
Snap is also a leader in augmented reality (AR), which allows businesses to create unique ad experiences. A clothing retailer can take a photo of a product, and Snap’s technology will create an AR version that users can “try on” virtually using their smartphone camera. Snap finds that businesses that incorporate AR into their campaigns receive a whopping 5x more attention, compared to their industry peers.
Image source: Getty Images.
Snap delivered solid financial results in Q2
Snap generated $1.24 billion in revenue during Q2, representing a 16% increase from the year-ago period, with every geographic region delivering growth. While advertising accounts for most of its revenue, Snap saw a whopping 151% increase in “other” revenue, which mainly comes from its Snapchat+ subscription service.
Snapchat+ is priced at $3.99 per month and gives users early access to new features while enhancing existing ones. (For example, subscribers can see how many times friends view their stories). The service launched in mid-2022 and already has 11 million subscribers, translating to over $100 million in quarterly revenue for Snap. It’s helping the company diversify its revenue base, which will provide some insulation in the event of any further disruption to its advertising business.
Snap’s 16% revenue growth lagged the 22% growth generated by its main rival Meta Platforms during the same quarter. However, it appears much of Snap’s growth was organic because the company only increased operating costs by 1.2% during Q2, compared to the year-ago period, and its marketing spending actually shrank. For context, Snap’s revenue fell by 4% in Q2 last year when it spent roughly the same amount on operating costs.
In other words, it appears the innovations its enacting are encouraging advertisers to spend more money.
Snap still lost $248.6 million on the bottom line during the recent quarter, but that was a big improvement from the $377.3 million net loss it generated in the year-ago quarter. Simply put, since Snap’s revenue grew so much faster than its costs, it was able to considerably shrink its losses. That momentum will need to continue for Snap to reach profitability on a GAAP basis.
The key reason Snap stock might be a buy now
Snapchat had a record 432 million daily active users at the end of Q2, which was a 9% increase from the year-ago period. As long as the platform continues to bring in new users, it’s going to be an attractive destination for advertisers. Plus, in 25 different countries, Snap reaches 75% of people aged between 13 years old and 34 years old. That’s a prime audience for businesses seeking to build brand awareness among young people.
According to research by SuperAwesome — a digital-marketing technology provider with a youth-focused ad marketplace — excitement is the most important emotional driver for brand loyalty among young teenagers. Therefore, advertising on platforms they visit for entertainment (like Snapchat) is a valuable way to reach them.
Snap stock is also trading at an attractive valuation right now. Its 42% decline this year, combined with the company’s continued revenue growth, has pushed its price-to-sales ratio (P/S) down to just 3, which is near its cheapest level since the company came public in 2017.
SNAP PS Ratio data by YCharts.
Considering the forward momentum in Snap’s business right now, this could be a good entry point for long-term investors.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Meta Platforms, and Roblox. The Motley Fool has a disclosure policy.
