The recent stock market downturn has negatively impacted numerous corporations, including Snap (SNAP -2.44%), a social media company. Although the company concluded 2024 with robust momentum, its shares have fallen by 18% since January. Despite this decline, there are compelling reasons to remain optimistic about Snap’s future. The company’s long-term outlook appears promising, notwithstanding the challenges faced in recent years. Below are further details on the situation.
### Reasons for Snap’s Underwhelming Returns
Snap Inc., the parent company of Snapchat, began trading publicly in March 2017. Since its initial public offering, the company’s performance has generally not met expectations. Several issues have plagued the tech leader. Competitors have replicated its unique disappearing photos and videos feature, an iOS software update complicated its ability to deploy targeted advertising, and reduced advertising budgets in an uncertain economic climate resulted in lower-than-expected revenues.
These challenges have led to inconsistent revenue growth and ongoing net losses, an unsustainable scenario for any business. Nevertheless, Snap’s financial performance for much of the previous year, including the fourth quarter, showed considerable improvement. The company’s revenue for the period reached $1.6 billion, a 14% increase compared to the same quarter of the previous year. Snap reported a net income of $9 million, a significant turnaround from the $248 million net loss in Q4 2023, while its adjusted EBITDA rose by 73% to $276 million over the same period.
Additional metrics demonstrated improvement, including Snap’s free cash flow. The Q4 results suggest the company’s business is on an upward trajectory and could perform exceptionally well over the next decade.
### Potential Developments Over the Next Decade
A majority of Snap’s revenue is generated from advertising, making user growth on its platform essential. The company is making strides in this regard. During Q4, Snap’s daily active users (DAUs) increased by 9% year-over-year to 453 million. Snapchat continues to introduce new features that enhance user engagement, particularly those powered by artificial intelligence (AI), which are proving popular.
One such feature, “Me in the 60’s,” was viewed over 900 million times during Q4. As long as Snap maintains a growing, engaged user base, the platform will remain attractive to advertisers aiming to connect with potential customers. Snap has also refined its advertising platform through advancements in machine learning.
In addition to advertising, Snap is seeking to diversify its revenue streams. A significant initiative is Snapchat+, a subscription model that the company has expanded over recent years. Snap reported that its “other revenue” increased by 131% year-over-year in 2024, reaching an annual run rate exceeding $500 million, largely thanks to Snapchat+. These subscriptions provide a consistent and predictable revenue source, positioning Snapchat+ to significantly contribute to Snap’s financial results in the coming years.
Moreover, Snap is investing in its long-term ambition to lead in augmented reality (AR). AR features, increasingly augmented by generative AI, are instrumental in boosting user engagement. Snap envisions further growth in its monthly active users (MAUs) on Snapchat, noting that its smartphone penetration in North America is presently only 22%, with even lower levels in other regions, suggesting substantial growth opportunities.
Despite competition from other social media platforms, Snap has carved out a niche by offering a distinctive user experience. As the company expands its MAUs and launches new features to drive engagement, ad revenue, and Snapchat+ subscriptions are likely to grow significantly. Concurrently, Snap’s profitability is anticipated to improve.
Though Snap has been a challenging stock since its IPO, the company has the potential to turn its fortunes around and deliver stronger returns due to a more diverse revenue base and AI-enhanced engagement and efficiency, particularly within its advertising platform. This context lends credence to the idea that Snap’s 18% decline this year could represent a valuable opportunity for long-term investors.