What’s Going On At Snapchat?

Key Takeaways

• Revenue grew 6% for the third quarter, but this is the slowest growth ever for the company.
• Snap continues to struggle with monetizing its user base, as represented by zero growth in the third quarter.
• On the positive side, daily active users across the globe continue to increase.

Snap was one of the companies that benefited from the pandemic. As people were forced to stay home, many flocked to social media. This led to a massive increase in daily users for Snap. As a result, the stock flourished. But as life began to return to normal, business at Snap slowed. Now Snap is in a transitional phase, hoping to survive a possible recession without too many lumps. Here is what investors need to know about Snap’s latest earnings and where the stock is going.

Snap stock in the news

Snap stock lost almost 30% of its value on Friday, October 21, 2022. The most cited issues that led to the decline of Snap’s stock value include lower-than-expected third quarter revenue and no guidance for the fourth quarter from Snap’s management apart from a statement that it expects flat growth for the fourth quarter. The decrease of advertising revenue for the third quarter and acknowledgement revenue will not grow in the fourth quarter hit Snap hard and indicates advertisers reducing their spending in anticipation of a recession.

The company reported a 6% year-over-year increase in revenue to $1.13 billion for the third quarter of the 2022 fiscal year. It also represents its slowest-ever quarterly growth rate. Wall Street predicted the company would show revenue of $1.12 billion.

While Snap beat earnings expectations, it reported a net loss of $359 million due to a 25% increase in spending and restructuring. The most significant part of the restructuring was laying off 20% of the company’s global workforce.

Another issue is Snap’s inability to monetize its user base into a reliable source of revenue, as evidenced by a loss in average revenue per user from $3.49 in the third quarter of FY 2021 to $3.11 in the third quarter of FY 2022. This represents an 11% loss in revenue per user among Snap’s total users on a global scale.

Snap had some positive news to share in the form of a 19% increase in daily active users (DAU) to 363 million, up from 306 million daily active users for the same quarter in 2021. While user growth occurs worldwide, Snap is seeing the most growth outside of North America and Europe.

Snap stock has only continued to drop throughout the week, closing at $9.17 yesterday, down 80.32% YTD.

Income statement review

Snap reported an operating loss of $359.5 million and a total comprehensive loss of $372.9 million for the third quarter that ended on September 30, 2022, and a total loss of $1.14 billion for the 9 months ending on the same date. This is a sharp increase from a loss of $71.9 million in the third quarter of FY 2021 and a $510.5 million loss for the first 9 nine months of 2021.

Some of the losses were driven by debt and equity securities at ($75.7 million), operating lease liabilities of ($12.1 million), purchases of property and equipment of ($37.8 million), and purchases of marketable securities at ($821.8 million).

Balance sheet review

Snap reported total unaudited assets of $8.28 billion at the end of the third quarter of FY 2022. Its current total liabilities are $5.38 billion, and it reported an accumulated deficit of $9.42 billion.

Its assets include $1.91 billion in cash and cash equivalents, $2.51 billion in marketable securities, $992.7 million in accounts receivables, and $115.9 million in prepaid expenses and other current assets.

Snap’s current liabilities include accounts payable of $188.6 million, operating lease liabilities of $57.9 million, and account expenses and other current liabilities of $893.4 million.

Outlook for Snap stock

Snap relies heavily on advertising revenue. The realm of social media as a profit center for advertisers is in flux as consumers have more options for their attention than they do time to spend on them. Advertisers rely on getting active users to buy the products they’re promoting, and if they sense they’re more likely to get viewers on another platform, they won’t hesitate to spend elsewhere. Snap is anticipating this by diversifying its efforts to reach users, provide entertainment, and give them an experience that keeps them returning to the Snap platform over others.

The company has significantly diversified its revenue streams during the third quarter of the 2022 fiscal year. The number of daily active users increased by 57 million compared to the same quarter in 2021.

The time users spent on the platform also increased, with the 35 and older demographic showing a 40% increase in their viewing time. The biggest issue is that its user base outside of North America and Europe is its fastest growing, yet income from North America averages $8.13 per user compared to $0.89 per user for those outside North America and Europe.

As the weak global economy strengthens and advertisers start spending money again, Snap has the foundation to surprise investors, assuming it can better monetize more of its user base.

Another potential area for growth is virtual reality. Snap has invested heavily in augmented reality to compete with Meta’s virtual reality platform. In 2021 the company purchased Wave Optics to help with this. However, it is yet unclear if people are interested enough in virtual reality to make it profitable for Snap. As investors have seen with Meta – a company that is 100% dedicated to virtual reality – the investment is still not paying off.

If Snap succeeds in its diversification efforts, its stock should weather the loss in value and regain some of its losses over time. It’s worth noting that all technology stocks have been hit hard by various market forces, and Snap is not the only one suffering.

However, it’s hard to ignore that the company lost 80% of its value in 2022. Its future relies on the ability of management to turn the user base into a reliable stream of revenue through its various efforts and return to profitability.

Bottom Line

Snap stock has been hit hard in 2022, and for a good reason. While active users grow, the company still needs to figure out how to best monetize this user base. Add in the fears of a global recession, and much of the advertising income Snap once had has dried up. Because of this, investors can be patient with this stock. There is no indication or reason for it to increase in value quickly. If investors see that advertisers are beginning to spend again, this could be a signal to slowly build a position in this stock.

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