Snap Inc. (SNAP) stock is up 20% after hours on news of an earnings beat. I'm calling this bounce as overdone. An earnings beat isn't enough for me when a stock still reports negative earnings. I'm also rather unimpressed by "flat" user growth. My take on Snap is simple. The stock is overpriced. It is an unnecessary risk to own a stock that can't create positive earnings in a quarter that included 36% revenue growth, this far along in the company's life. Snap is not a startup. It's been around for awhile. There should be some meaningful value being created for shareholders. Yes, losses narrowed in the fourth quarter. But the combination of losses, cash on hand, and first quarter guidance imply Snap will continue to face pressure in terms of capital.
Revenues increased 36% to $390 million in the fourth quarter. Full year revenue was $1.2 billion -- a 43% increase. On that kind of sales growth, it's insane to me that we haven't seen positive net income. The reduction in total costs/expenses to $584.53 million vs. $646.66 million the year prior helped cut the losses being incurred by Snap. Total operating losses were $194.7 million compared to a loss of $360.96 million in fourth quarter 2017. Net losses improved 46% to $191.67 million. On a per share basis, the losses break down to $0.14 per diluted share (many are reporting the company's non-GAAP results of $0.04 a share. I find it to be a flawed view). That's a 48% improvement in losses year over year; but it should be noted that the shares outstanding have continued to rise.
In the earnings release, CEO Evan Spiegel reiterated that the company had focused on creating the ability to "scale the business over the long term". Personally I think the continually weak user growth demonstrates that Snap is the weakest link within social media stocks. At least Facebook (FB) and Twitter (TWTR) have some demonstrable earnings to speak of.
So will Snap find profits? I believe it will. The slow improvements in operating income imply that we should see some earnings at some point. The big issue here is how long that will take, and how meaningful those earnings will really be. Let's not forget, Snap doesn't just need to find profitability. The company needs to thrive if shareholders are to be truly rewarded for their patience. To do that, they need much broader user engagement than I'm seeing. Daily active users were 186 million in the fourth vs. 187 million in the third quarter. A statistic that concerns me is how Snap noted they reached 70% of the 13 to 34 year old U.S. demographic with ads per month. If their ads are getting to that large a piece of the audience group most likely to really use the app, how much more revenue can be derived?
First-quarter 2019 guidance suggests the revenue story can continue. Revenue is forecast to grow between 24-34% in the first quarter to $285 million -310 million. Adjusted EBITDA are expected to once again be negative; with guidance of $(165) million and $(140) million. That would be an improvement year over year, but it's still no cause for celebration. As I said before, for SNAP to be a worthwhile investment, the company has to thrive not just survive.
Overall, I'm not really a fan of social media stocks at all. I don't own any. At this time, I view SNAP as a "sell." At least rivals like Twitter and Facebook offer a viable financial position. With stagnant user growth, there isn't a clear path to long term sales potential. The company is certainly deriving more value from its current user base, but it's abundantly clear that Facebook's Instagram app and the ever more prevalent "stories" feature are the real breadwinners within fast paced social media videos and pictures. Again, I don't like social media stocks in general. If you're going to buy one, at least pick one with earnings.