Snap Inc. (NYSE:SNAP) had an awful day on Tuesday, rising 4% during regular trading hours but plunging 32% in post-market trading. Value-conscious investors might typically relish fire sales like this, but conducting one’s due diligence is always a prerequisite.
After all, some share-price haircuts fall into the “cheap for a reason” category. Let’s figure out what prompted the sell-off and determine whether it’s time to snap up some shares of SNAP stock.
It’s not TikTok, but it’s still pretty good
Whereas the COVID-19 pandemic was miserable and tragic overall, it provided a positive catalyst for Snap and its Snapchat social-media app. People were stuck at home and bored, but they could always turn to apps like Snapchat for amusement and connection with other human beings.
The COVID-19 catalyst wasn’t enough to put Snap in a profitable position. However, it did spur a massive buying spree for a while, with SNAP stock rising from $17 in early 2020 to more than $80 for a hot minute in 2021.
Not to wax nostalgic, but that was a time when it felt like nothing could possibly go wrong in the financial markets. Interest-rate policy was highly accommodative, and everything from 3D-printing start-ups to non-fungible tokens (NFTs) and special-purpose acquisition companies (SPACs) seemed like fail-safe winners.
Then came 2022, and elevated interest rates put the squeeze on many highly speculative businesses; then in early 2023, a handful of regional banks imploded. Suddenly, Snapchat needed to justify its existence to wary investors.
It also didn’t help Snapchat when China’s TikTok gained popularity and, most likely, stole some of its market share. Still, Snap appeared to be in reasonably good shape in the third quarter as it posted 5% year-over-year revenue growth and a net earnings loss that only increased slightly ($368 million in Q3 2023 versus $360 million in Q3 2022).
Those aren’t miraculous results, but they’re at least acceptable. Now with Snap having just released its fourth-quarter stats, it’s time to find out whether it fared well or failed.
Nothing objectionable here
If you know that SNAP stock plummeted 32% in after-hours trading, you might assume that Snap’s quarterly results were truly awful. Yet, that’s actually not the case.
Starting with the top line, Snap generated revenue of $1.361 billion in the fourth quarter of 2023, up 5% year over year. There’s nothing to write home about here, but also nothing too objectionable.
Next, Snap’s free cash flow (FCF) jumped from $78 million in the year-earlier quarter to $111 million in Q4 2023. That’s actually a good sign for the company, wouldn’t you agree?
In addition, Snap reported another net earnings loss (as usual), but at least it’s shrinking. Specifically, Snap’s fourth-quarter net loss totaled $248 million, versus $288 million in the year-earlier quarter.
Additionally, Snap’s chief executive, Evan Spiegel, pointed out that even the TikTok threat couldn’t prevent the company from growing its user base last year.
Spiegel assured investors, “2023 was a pivotal year for Snap, as we transformed our advertising business and continued to expand our global community, reaching 414 million daily active users.”
Why did SNAP stock collapse?
Given the company’s acceptable quarterly results, it’s somewhat difficult to determine why the market immediately dumped SNAP stock. A report from Barron’s blames what it calls Snap’s “disappointing outlook.” For the current quarter, Snap anticipates an adjusted EBITDA loss of $55 million to $95 million, while Wall Street had called for a $21 million adjusted EBITDA loss.
However, Bloomberg attributes the share-price dumpage to “disappointing revenue during [an] ad slump.” To reiterate, Snap reported Q4 revenue of around $1.36 billion, although analysts had expected it to be slightly higher, with the consensus estimate calling for $1.38 billion.
If those are the reasons why investors pushed SNAP stock down 32%, they seem like flimsy excuses to me. Granted, it’s challenging to know whether there’s actually a bargain here since Snap is unprofitable and consequently has no trailing price-to-earnings (P/E) ratio to use as a valuation gauge.
Nevertheless, the sell-off strikes me as overdone. However, this may be because I tend to put more weight on actual results than forward guidance, which is sometimes flat-out wrong.
I can see why SNAP stock declined, but it’s not as if Snap is going out of business or unexpectedly printing up millions of shares to raise capital. The news isn’t all that bad, so I’m prepared to recommend that level-headed investors consider taking a small share position in Snap.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
