The changes in SNAP stock over the recent years have been far from consistent. Returns for the stock were -6% in 2021, -81% in 2022, 89% in 2023, and -36% in 2024.
In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that SNAP underperformed the S&P in 2021, 2022 and 2024.
For Q4 FY 2024, Snap reported revenues of $1.58 billion, 14% more than the year-ago period. The net income was $9 million, compared to a net loss of $248 million in the previous year. Adjusted earnings were recorded at $0.16 compared to $0.08 in the previous year.
The onset of the pandemic initially caused a decline in demand for IT software and web services, as consumers prioritized essential goods over discretionary items. However, the sector experienced a rebound in subsequent quarters, with companies offering solutions for remote collaboration seeing the most significant gains. This growth momentum then moderated in fiscal years 2022 and 2023 due to a challenging macroeconomic environment with high interest rates.
Below are key drivers of Snap's value that present opportunities for upside or downside to the current Trefis price estimate:
Snap Inc.'s Average Revenue Per User (ARPU) in North America remains the most significant determinant of its overall valuation. The company adopted a deliberate strategy for its advertising business, introducing ads with a strong emphasis on user engagement and non-intrusiveness to enhance user experience and protect advertiser brands. We anticipate a steady increase in average revenue per North American user, projecting a rise from approximately $32 in 2024 to over $42 by the conclusion of our review period.
However, if Snap Inc. can achieve stronger-than-expected ARPU growth, reaching over $55 by the end of the forecast period due to heightened user engagement and advertiser demand, our price estimate could see an upside of more than 10%. Conversely, if challenges in monetization or increased competition for mobile advertising dollars cause ARPU to decline to around $28, our valuation could be reduced by approximately 15%.
While Snap Inc. brands itself as a "camera company," its primary offering remains the popular smartphone application Snapchat. This app enables users to communicate through ephemeral short videos and images. By 2024, the company had garnered over 400 million average daily active users. Snap Inc.'s revenue is predominantly generated from advertising within its Snap Stories and through its creative tools, such as filters and lenses.
We estimate that the company's North American Advertising business is more valuable compared to its International Ads and Spectacles due to:
In 2024, Snap Inc.'s average annual revenue per daily active user in North America was approximately $32, which was about five times greater than the figure for its international markets. This significant difference can be attributed to factors such as lower purchasing power in many international markets and Snap's strategic prioritization of scaling its advertising business within the U.S. before focusing extensively on global expansion. While we anticipate that ARPU growth rates in international markets will be somewhat higher over the long term, we believe the substantial gap between international and North American ARPU will likely persist.
Internet service companies, including social networks and messaging platforms, typically enjoy high profit margins because their direct operational costs, such as cloud infrastructure, are relatively low compared to their revenues. Additionally, other expenses like Research and Development tend to be largely fixed. This contrasts sharply with hardware businesses, such as Snap's Spectacles, which incur substantial costs related to manufacturing, distribution logistics, and managing inventory.
Snap Inc. is well-positioned to benefit from several key shifts currently shaping the advertising market:
The Dominance of Mobile Advertising: The advertising industry is experiencing a significant and ongoing migration of budgets from traditional media to mobile and digital formats. Mobile advertising stands out as the fastest-growing segment within the broader advertising market and is projected to maintain its exponential growth trajectory. Conversely, spending on advertising in other formats is generally expected to decline. This trend is particularly favorable for Snap Inc., as its core product, Snapchat, is exclusively a mobile platform. The decline of traditional media also presents a challenge for advertisers seeking to connect with younger demographics, creating a significant opportunity for Snapchat, which primarily caters to this audience. Current data indicates that a substantial majority of Snap's users in the United States fall within the 15 to 35 age group, a significantly higher percentage compared to platforms like Meta's Facebook.
The Rise of Video Advertising: Video advertisements have emerged as a major growth driver within the mobile advertising space. This trend is particularly advantageous for Snap Inc., given that its platform is heavily focused on video content. This emphasis on video positions Snap to capture a portion of the advertising dollars that were traditionally allocated to television commercials.
Strategic Focus on the U.S. Market: While international markets represent a growth opportunity, advertising spending in these regions generally remains lower compared to developed markets such as the U.S., primarily due to differences in purchasing power. Snap Inc.'s user base has a strong concentration in North America, where advertising expenditure is expected to remain considerably higher in the near future, allowing Snap to focus on a more lucrative market.
The core Snapchat platform, which now engages over 400 million daily active users, remains the company's most valuable asset. Snap Inc.'s strategic imperative should be to ensure that its other endeavors, including hardware, ultimately enhance the core platform by fostering increased customer loyalty and user engagement. The platform, which facilitates interactions among its users, is likely to hold greater long-term value compared to individual hardware products. Hardware development demands substantial resources, time, and capital, and products face continuous competition based on differentiation. This platform-centric strategy has proven highly successful for companies like Meta (Facebook) and Google. As long as Snap Inc. aligns its hardware ambitions with the goal of strengthening its core platform, the company should be able to sustain and potentially improve its overall valuation.
Snapchat has demonstrated a strong understanding of the evolving needs of users within the 18-24 age group, a demographic highly valued by advertisers. The Snapchat app has evolved significantly over the years, with the introduction of various features that have resonated well with its core user base. Starting with disappearing messages as its primary interaction format, the platform expanded to include Stories and the Discover section, effectively transforming Snapchat into a dynamic media platform. However, Snap Inc. faces significant competition from Meta, the social media giant, which has achieved substantial growth through its early market entry and strategic acquisitions like WhatsApp and Instagram. Meta has consistently implemented Snapchat-like features, such as Stories, across its WhatsApp and Instagram platforms. This ongoing competitive pressure from a company with a vast user base could potentially impede Snap Inc.'s growth, particularly in international markets where Meta's products enjoy widespread adoption.
