Investors cheered the company’s fastest growth in two years.
Shares of social media app Snap (SNAP 3.63%) were up 31.1% in April, according to data provided by S&P Global Market Intelligence. It was a quiet month, with shares trading flat until April 25. But then the company reported financial results, and the stock exploded higher.
Snap reported financial results for the first quarter of 2024, showing 21% year-over-year top-line growth, which was its best growth in two years. Analysts widely praised the Q1 report. Perhaps the most impressed was Truist Financial analyst Youssef Squali, who raised his target price for Snap stock by more than 30% to $16 per share, according to The Fly.
Squali praised several things with Snap’s business, including improvements to its advertising business, growth in its subscription business, and also greater discipline in keeping expenses under control. Judging by the reaction with the stock price, I believe many investors and analysts share Squali’s beliefs regarding Snap.
More work to do with its expenses
If I could respectfully push back on Squali’s commentary in one area, it would be in praising Snap’s control over expenses. Total Q1 operating expenses rose 13% year over year to over $1.5 billion. Granted, revenue went up at a faster rate, which is good. But general and administrative expenses (corporate) were up 20%, which was nearly as much as revenue growth, even though it’s the first area I would expect it to find some operating leverage.
Some might point out that Snap generated positive Q1 free cash flow of $38 million, which is true. But once again, this isn’t reason for too much celebration. Q1 free cash flow of $38 million was down substantially from free cash flow of $103 million in the prior-year period. Moreover, its cash flow is only positive because of its liberal use of stock-based compensation — over $250 million in Q1 alone.
When looking at unadjusted profitability, Snap had a Q1 net loss of $305 million. That’s hefty and shows that there’s still plenty of work to do.
Snap is attracting users and growing ad rates
While I believe Snap has more work to do on the bottom line, it’s clearly doing something right for the top line. At least it’s starting to. In Q1, daily active users were up 10% year over year, providing a large portion of its revenue growth — having more users on the platform meant an increase in ad impressions, or the number of times ads were viewed.
That said, Snap did see an 8% jump in how much it’s making per ad impression. It’s worth pointing out that not all advertising companies are seeing that level of increase. Therefore, the investments Snap has made in its business could be starting to pay off, which is a reason for optimism.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Truist Financial. The Motley Fool has a disclosure policy.
