Here’s why Snap Stock lost 30% of its value in August

Shares of Snapchat’s parent company Snap (SNAP -1.04%) lost 29.9% of their value in August, according to data provided by S&P Global Market Intelligence. And the entire decline occurred on August 2, the day after it reported financial results for the second quarter (Q2) of 2024.

Snap’s revenue rose 16% year-over-year to more than $1.2 billion, which would have been good enough to satisfy investors. But the company believes its Q3 revenue will grow only 12% to 16%. That’s slower than investors had hoped. And that’s why the stock fell so hard during the month.

Why Snap’s Growth Rate Isn’t Good Enough

On the one hand, double-digit growth is almost always a good thing, and Snap has that. On the other hand, Snap is in an interesting situation. The company has grown its user base in recent years and made improvements to its platform for advertisers. This was expected to increase its monetization rates, and it did for a short time.

Monetization is measured by a metric called effective cost per mile (eCPM), or what an advertising platform pays for 1,000 ad impressions. After steep declines throughout 2023, Snap reported eCPM growth of 8% in Q1, apparently a signal that its investments have paid off. But in Q2, eCPM fell 3%.

Consider that Snap now has more than 850 million monthly users, and that growth has increased ad volume. If the company’s eCPM also increased, it would result in an impressive increase in revenue. For context, other advertising companies have seen improvements. But Snap’s platform just isn’t attracting the level of demand investors were hoping for right now.

Should investors take a chance on Snap stock?

Snap Stock has disappointed shareholders for years. But it’s worth pointing out that at less than three times sales, Snap stock has never been cheaper. In other words, it’s trading at a bargain price right now. And if the business can grow profitably over the long term, then the upside could be substantial.

However, I’m not sure investors should take a chance on Snap stock today. There are two main problems. First, it’s concerning that Snap isn’t monetizing its platform as well as other similar companies. After all, its user base is young, which is attractive to advertisers.

Second, Snap is still burning a lot of cash. On a net basis, it lost more than $500 million in the first half of 2024 alone. And even on a free cash flow basis, it lost nearly $36 million during that time.

Given the slowing growth and ongoing losses, I’d say investors would do well to hold off on Snap stock. It has potential. But I’d like to see a brighter glimmer of hope that it can reach that potential before I buy.