Snap (NYSE:SNAP) stock is having an amazing run. Skeptics, including this author, have looked foolish recently. But let’s get serious. While it has been fun times for owners of SNAP stock lately, this rally will disappear faster than a Snapchat photo.
Yes, Snapchat just reported another reasonably good quarterly earnings report. But even with decent numbers, it shows just how far away Snap is from having a reasonably valued business.
Sure, Snap has certainly picked up its game since last year. And it makes sense that the SNAP stock price is up from single digits. But with shares up more than 200% since last December, there has never been a better time to take profits on Snapchat stock than right now.
Quarterly Earnings: Pretty Good, Not Great
Snap just put out its most recent earnings report. Almost all the numbers were solid, and ahead of expectations. Yet the rally in Snapchat stock fizzled out pretty quickly following the upbeat report. What’s going on?
To start off, Snap posted a great revenue number of $388 million for the quarter. That smashed expectations of just $358 million. It also amounted to a 48% year-over-year growth rate, which is accelerating from previous quarters.
How’d they pull off such a big beat? They added more users than expected and got more advertising partners on-board. CEO Evan Spiegel, on the conference call, described how the company’s innovative mobile video ad product is attracting advertising dollars. They’re bringing increasingly top-notch partners, such as Disney’s (NYSE:DIS) ESPN. With the company’s leading position in the 13-to-34-year-old demographic, several advertisers like what Snap is offering.
However, despite the robust top-line figures, Snap continues to lose money. It lost 6 cents for the quarter, which modestly topped expectations of a 10-cent loss. On a GAAP basis, which adds back in real costs such as stock compensation, Snap lost 19 cents per share.
Snap’s Strongest Point: User Growth Is Back
One of the reasons why SNAP stock performed terribly following its initial public offering was that it appeared to be conveniently timed. Snap went public right as its user growth was peaking. Facebook (NASDAQ:FB) was already starting to mimic Snapchat’s most innovative features. Within a couple quarters, Snap’s daily active user growth stopped altogether, and Snapchat stock tanked.
It’s one thing to run a money-losing company with a lot of user growth. It’s another thing altogether to be losing money and not adding any new users.
So, we have to give credit to Snap’s management this quarter. They got the user figure over 200 million after stalling out in the 180 million to 190 million range for several years. Daily active users jumped by 13 million in fact, showing that Snap’s app redesign actually paid off.
Analysts had expected a jump of just two million active users, so that 13 million figure was fantastic. Still, we’ll have to see if it was a one-quarter burst, or the start of a new trend. Analysts are modeling user growth to slow back down in coming quarters.
Don’t Overlook Government Regulatory Threat
It’s easy to think that SNAP stock will be a winner as the government cracks down on some of its competitors. The Department of Justice just announced a broader investigation into big tech. This move intensifies the government’s regulatory efforts that it announced earlier this year.
In theory, this should be good for Snapchat stock. In particular, if the government tries to break up the internet advertising duopoly that Google (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook hold, secondary players like Snap and Twitter (NYSE:TWTR) should benefit.
But there’s a chance that the government’s scrutiny will hit smaller players as well. Take the recent social media regulation bill that Senator Josh Hawley is pushing. It would ban or limit a lot of features that critics say are aimed at getting people addicted to social media.
Hawley’s bill would go after Snap, and its Snapstreak function in particular. Snapstreak is a feature users get when they send at least one Snap message every 24 hours. The legislation, named the Social Media Addiction Reduction Technology Act (SMART), aims to eliminate these sorts of features that keep people using the app on a consistent basis. It also targets other things such as auto-playing content and infinite scrolling in social media feeds as well.
And it isn’t just Republicans talking about this sort of social media crackdown. Democratic presidential candidates such as Andrew Yang have also called for creating a government bureau to regulate how tech companies market their products toward minors. Such a move could directly impact the SNAP stock price longer term.
SNAP Stock Verdict
Snap is getting a lot right. In particular, it has user growth again. If they can keep that up for more than a quarter or two, it’s possible to see a path to profitability going forward. As it is, Snap has lost 81 cents per share over the past year. Analysts see the firm nearly breaking even over the next 12 months, with a loss of just a few pennies going forward.
But with the huge run in SNAP stock already, this improvement is more than baked in. The company is selling for more than 15-times sales and yet profitability is still a year off; there’s not even free cash flow yet. It’s hard to justify that valuation against something like Twitter, which is trading for just 10-times sales, makes robust profits, and whose market capitalization isn’t that much larger overall. If Snap hits any problems, such as a slowdown in user growth, the stock will sink sharply.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.
