Advertising demand isn’t strong enough to boost its monetization rates.
Shares of Snapchat’s parent company Snap (SNAP -1.04%) lost 29.9% of their value during August, according to data provided by S&P Global Market Intelligence. And the whole drop happened on Aug. 2, the day after it reported financial results for the second quarter (Q2) of 2024.
Snap’s Q2 revenue was up 16% year over year to over $1.2 billion, which would have been good enough to satisfy investors. But the company thinks that its Q3 revenue will only be up by 12% to 16%. That’s slower than what investors had hoped. And it’s why the stock was down so sharply during the month.
Why Snap’s growth rate isn’t good enough
On 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 briefly did.
Monetization is measured with a metric called effective cost per mille (eCPM) or what an advertising platform gets paid per 1,000 ad impressions. After steep declines throughout 2023, Snap reported eCPM growth of 8% in Q1, seemingly a signal that its investments were paying off. But in Q2, eCPM dropped by 3%.
Consider that Snap now has over 850 million monthly users, and this growth has increased ad volume. If the company’s eCPM jumped higher as well, it would result in impressive revenue growth. For context, other advertising businesses have seen improvements. But Snap’s platform just isn’t attracting the level of demand that investors had hoped for at this point.
Should investors take a chance on Snap stock?
Snap stock has disappointed shareholders for years now. But it’s worth pointing out that at under three times sales, Snap stock has never been cheaper. In other words, it trades at a bargain price right now. And if the business can profitably grow 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 issues. First, it’s concerning that Snap isn’t monetizing its platform as well as some other similar businesses. After all, its user base is young, which is appealing to advertisers.
Second, Snap is still burning a lot of cash. On a net basis, it lost over $500 million in the first half of 2024 alone. And even on a free-cash-flow basis, it lost almost $36 million during this time.
With growth slowing and losses ongoing, I’d say investors would do well to wait with Snap stock. It has potential. But I’d want to see a brighter glimmer of hope that it can live up to that potential before buying.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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