The recent stock market sell-off is dragging down many corporations, including Snap (SNAP -9.29%), a social media specialist. Though the company ended 2024 with strong momentum, its shares have declined by 18% since January. Still, there are good reasons to be bullish on Snap. The company’s long-term prospects look attractive despite a turbulent past few years. Read on to find out more.
Why Snap has failed to deliver solid returns
Snap, the parent company of Snapchat, became publicly traded in March 2017. Since then, the company’s performance has not been impressive, to put it mildly. The tech leader has encountered several problems. To name just three of those issues: Some social media platforms copied its signature self-destructing pictures and videos model; an iOS software update made it harder for the company to launch targeted ads; and a significant slowdown in ad spending amid economic challenges led to worse-than-expected revenue.
The result has been inconsistent top-line growth and persistent net losses, which is not a recipe for success for any company. However, Snap’s financial results for much of last year, including the fourth quarter, were pretty strong. The company’s revenue of $1.6 billion for the period was up 14% compared to the year-ago quarter. Snap turned in a net income of $9 million compared to a net loss of $248 million reported in Q4 2023, while its adjusted earnings before interests, taxes, depreciation, and amortization (EBITDA) landed at $276 million, up 73% compared to the year-ago period.
Several other key metrics, including Snap’s free cash flow, improved. Snap’s Q4 results weren’t just a fluke. The company’s business is improving and could deliver excellent results over the next decade.
How things could evolve in the next 10 years
Snap still makes most of its money from ads. So it’s crucial for the company’s platform to continue growing its users. The social media specialist is making progress. In Q4, Snap’s daily active users (DAUs) climbed by 9% year over year to 453 million. In addition, Snap continues to launch features on Snapchat that help increase engagement, with artificial intelligence (AI)-powered ones being popular.
In Q4, Snapchat’s “Me in the 60’s,” a feature that generates a picture of what a user would look like in the 60’s, was viewed more than 900 million times. So long as Snap has a growing base of users who engage in projects like these, Snapchat will be a good target for companies looking to reach potential customers. And in recent years, the company has improved its advertising platform thanks to machine learning.
However, Snap has been looking to diversify its revenue sources. One of the company’s best efforts is Snapchat+, a subscription option that it has been ramping up in the past few years. Snap noted that its “other revenue” grew by 131% year over year in 2024 and ended the year with an annual run rate of over $500 million. Most of that comes from Snapchat+. These subscriptions provide a steady, reliable, predictable source of revenue for the company. Given its current run rate, Snapchat+ should contribute meaningfully to Snap’s results in the next few years.
Furthermore, Snap continues to invest in its long-term plan to be a leader in augmented reality (AR). AR-based features on the app, increasingly powered by generative AI, help drive engagement. Here’s what all this could mean for the company’s future. Snap still sees significant room to grow monthly active users (MAUs) on Snapchat, considering its smartphone penetration in North America is only 22%. It’s even lower in other regions, so the company has substantial whitespace.
Even though there are other social media platforms, Snap has established itself as a leader — it offers a somewhat different experience from its peers. As Snap’s MAUs expand and the company introduces newer features to grow engagement, ad revenue and Snapchat+ subscriptions should increase at a good clip. Meanwhile, Snap’s profitability should continue improving.
So, despite being a disappointing stock since its initial public offering (IPO), Snap could turn things around and deliver much stronger returns from here on out thanks to a more diversified base of revenue and AI features that are helping improve engagement and efficiency across the company’s business, including within its advertising platform. That’s why Snap’s 18% drop this year represents an excellent opportunity for long-term investors.