Can Stock Snap Back be snapped? Why its 47% year-to-date decline could be a buying opportunity.

Snap (SNAP -0.79%) is the parent company of the social media platform Snapchat. Its stock has underperformed since the end of 2021, collapsing along with much of the tech sector during that time. It’s down 47% so far in 2024 as investors seem unsatisfied with the company’s modest revenue growth (compared to its peers) and its continued losses.

The company’s business has had an additional problem to manage since 2021 due to which Apple change the privacy policies for the applications available on its devices. The change made it more difficult for app developers in its ecosystem to track its users across the internet. That meant social media platforms like Snapchat had a much harder time selling highly targeted advertising slots.

Solving this problem remains a challenge, but Snap is finding ways to innovate and making clear progress. There’s also a key reason why Snap’s business could thrive again. Here’s why the decline in its stock this year could be a long-term buying opportunity.

Snap continues to innovate

As with most social media platforms, advertising is Snap’s primary source of revenue. The company continues to come up with creative ways to improve ROAS for businesses with a combination of innovative new concepts.

For example, the company launched its 7/0 optimization model last year. Allocate a seven-day learning period to each new campaign with the budget calculated from scratch based on results. In other words, the model makes no assumptions based on ad spend or past results, but is entirely based on performance. This can improve cost efficiency. During the second quarter of 2024 (ended June 30), some gaming companies such as Robloxhave seen a 30% to 50% increase in return on ad spend with 7/0 optimization.

Snap also offers a tool called Conversions API, which saw a 300% increase in adoption in Q2 compared to the year-ago period. This is a direct solution to Apple’s privacy changes, as it does not 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. This means that Snap gets first-hand data about its users’ buying patterns and knows exactly which ads drove sales. This will dramatically improve targeting over time.

Snap is also a leader in augmented reality (AR), which enables companies to create unique advertising experiences. A clothing retailer can take a photo of a product, and Snap’s technology will create an AR version that users can virtually “try on” using their smartphone camera. Snap finds that companies that incorporate AR into their campaigns receive 5x more attention compared to their industry peers.

Image source: Getty Images.

Snap delivered solid financial results in Q2

Snap generated revenue of $1.24 billion in Q2, up 16% from the year-ago period, with every geographic region producing growth. While advertising makes up the bulk of its revenue, Snap saw a staggering 151% increase in “other” revenue, which comes primarily from its Snapchat+ subscription service.

Snapchat+ is priced at $3.99 per month and gives users early access to new features while improving existing ones. (For example, subscribers can see how many times their friends are viewing their stories). The service launched in mid-2022 and already has 11 million subscribers, which means more than $100 million in quarterly revenue for Snap. It helps 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 its main rival’s 22% growth Meta platforms during the same quarter. However, it appears that much of Snap’s growth was organic, as the company only increased operating costs by 1.2% during the second quarter compared to the year-ago period, and its marketing expenses actually. has shrunk. For context, Snap’s revenue he fell up 4% in Q2 last year, when it spent about the same amount on operating costs.

In other words, it appears that the innovations it is implementing are encouraging advertisers to spend more money.

Snap still lost $248.6 million in the latest quarter, but that was a significant improvement over the $377.3 million net loss it posted in the year-ago quarter. Simply put, because Snap’s revenue grew much faster than its costs, it was able to cut its losses considerably. That momentum will need to continue for Snap to reach profitability on a GAAP basis.

The main reason why Snap stock could be a buy now

Snapchat had a record 432 million daily active users at the end of the second quarter, which was a 9% increase from the year-ago period. As long as the platform continues to bring in new users, it will be an attractive destination for advertisers. Additionally, in 25 different countries, Snap reaches 75% of people between the ages of 13 and 34. This is a prime audience for companies looking to build brand awareness among young people.

According to research by SuperAwesome — a digital marketing technology provider with a youth-focused advertising market — excitement is the most important emotional driver of brand loyalty among young teens. Therefore, advertising on the 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 (P/S) ratio to just 3, which is close to its cheapest level since the company went public in 2017.

SNAP PS Ratio data by YCharts.

Given the forward momentum in Snap’s business right now, this could be a good entry point for long-term investors.