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Shares of social media company, Snap (NYSE: SNAP) are down over 18% in pre-market trading after the company announced its Q2 results yesterday.
Snap reported a loss per share of $0.02 compared to estimates of $0.04 in the June quarter. Its revenue stood at $1.07 billion, above estimates of $1.05 billion, while the company ended the quarter with daily active users of 397 million vs. forecasts of 394.9 million. Its average revenue per user stood at $2.69 compared to estimates of $2.68.
So, why did SNAP stock fall despite beating Wall Street estimates in Q2? The company provided weaker-than-expected guidance resulting in a steep sell-off in shares.
How did Snap perform in Q2?
Snap’s sales in Q2 fell 4% from its year-ago revenue of $1.11 billion. It was the second consecutive quarter of year-over-year revenue decline for the social media company.
But Snap narrowed its losses by 11% to $377.3 million or $0.24 per share. In the year-ago period, it reported a net loss of $422.1 million or $0.26 per share.
Snap expects sales between $1.07 billion and $1.13 billion in Q3 if its daily active users increase to 405 million. Snap will likely report a third consecutive quarter of revenue decline at the lower end of its guidance. Comparatively, analysts expected DAUs to surge to 406 million and sales to be flat year over year at $1.13 billion in Q3.
Like several other tech companies, Snap has been wrestling with a sluggish macro environment in the last five quarters. Due to rising interest rates and elevated inflation levels, ad spending by enterprises has declined considerably since the start of 2022.
Due to its poor financials, Snap stock is currently down almost 90% from all-time highs valuing the company at a market cap of $16 billion.
Can SNAP stock stage a comeback?
To tide over near-term headwinds, Snap initiated a cost-cutting plan last year when it laid off 20% of its workforce. Due to its cost-saving initiatives, Snap’s operating expenses were down 8% year over year in Q2 at $615 million.
Snap also unveiled its Snapchat+ subscription plan in June 2022, where users can access exclusive features for $3.99 per month, unlocking another revenue stream for the entity.
Snap CEO Evan Spiegel explained, “We are excited by the progress we have made delivering increased return on investment for our advertising partners, growing our community to 397 million daily active users, and reaching more than 4 million Snapchat+ subscribers.”
Analysts expect Snap to end 2023 with sales of $4.07 billion, a decline of 11% year over year. Comparatively, sales might increase by 15% to $4.7 billion in 2024.
So, SNAP stock is priced at 4x forward sales, which is quite steep for a loss-making company grappling with falling revenue.
The final takeaway
Investing in Snap stock is quite risky due to its weak balance sheet. Though it has $4 billion in cash, the company competes with other tech giants, such as Meta and Alphabet’s YouTube, which are much bigger in size and armed with deep pockets.
Meta (NASDAQ: META) and Alphabet (NASDAQ: GOOGL) continue to invest heavily in research and development, which should drive higher customer engagement rates over time. Snap will have to widen its user base and further monetize its base of DAUs while improving profit margins.
Analysts tracking SNAP stock have a 12-month price target of $9, which should move lower post its Q2 results.
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