Yesterday, Snap (NASDAQ: SNAP) reported earnings and it wasn’t pretty. Headlines screamed that the company lost over $2 billion in the first quarter. This sent investors sprinting to the door, selling Snap stock as fast as possible. The result was a 25% drop in the stock price in after hours trading.
But it’s important as an investor that you don’t just read the headline, you read the story to get a complete understanding of what happened and what is happening with a company. I am going to break down the results of Snap earnings so that you can make a better decision to invest your money in this company or not.
As I mentioned, Snap reported a loss of over $2 billion for the first quarter. But this was mostly due to employee and CEO stock awards that were paid out as a bonus when the company went public. In total, these awards come to $2 billion and the actual loss the company realized for the first quarter was $188 million.
That loss is much more palatable than $2 billion. And as an investor you should be aware that more and more tech companies are now reporting these employee stock awards in their public earnings releases, so let this be a lesson that you really do need to read the whole story and not just the headline.
Getting back to earnings, revenue came in at $150 million but missed estimates of $158 million. Daily active users increased by 36% as well. Adjusted earnings per share show a net loss of $0.20 which also is worse than analysts expected.
So now that you see the earnings aren’t as scary, is Snap a good investment?
Issue At Snap?
Snap is facing a lot of headwind as it tries to grow into a more profitable company. Let’s first look at user growth. Analysts love to look at how apps like Snap add users to imply growth.
While it looks good that daily active users were up 36% for the first quarter, they have been trending down. In the fourth quarter of 2016, daily active users were up 47% and in the third quarter of 2016, daily active users were up 62%.
It is common for user growth to slow over time, but it shouldn’t be happening this soon.
In addition, Facebook, which is a main rival to Snap, has been hard at work trying to steal users away. Facebook has introduced Instagram Stories, which competes head to head with Snap. Snap has responded by offering videos longer than 10 seconds to try to keep users active and by giving the option to not have videos automatically delete after viewing.
And then there is advertising dollars. A recent study found that advertisers prefer Instagram and many other social media platforms to advertise on more than Snap. Since this is where Snap makes its money it should be a concern to investors.
Should You Invest In Snap?
Even with the issues I note above, I still think Snap is a long term play. The stock valuation before the drop yesterday was too rich, but now is more in line with earnings. I feel that the stock is a buy at these levels for investors who have patience.
The company is innovating and working on new features to bring in new users and they are also working on their ad strategy to better earn income from their current users.
The stock isn’t going trade anywhere near where is was trading in the short term. It will take time and the company will have to show Wall Street the user growth and income it wants to see.
So if you have been itching to invest in Snap but thought it was too pricey, you can invest now or wait a little and still buy in at a reasonable price.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.