Headwinds are turning into tailwinds for this social media mainstay.
Snap Inc. (SNAP 3.87%) is the parent company of social media platform Snapchat, and its stock is trading 82% below its all-time high, which was set in 2021. A couple of things happened. Valuations in the technology sector cooled off when the Nasdaq-100 plunged 33% in 2022, and soaring interest rates triggered a slowdown in the advertising industry.
However, Snap stock soared almost 28% last Friday following the release of an overwhelmingly positive set of results for the first quarter of 2024, which suggested the tide might finally be turning. Here's why it might be time to buy Snap stock on the dip.
Snap's focus on innovation is finally paying off
Every social media platform that relies on digital advertising to generate revenue suffered in 2022, including Snap's main rival, Meta Platforms, which owns Facebook and Instagram. However, the social media industry was also grappling with changes to Apple's privacy policy in 2021, which made it harder for them to track their users across the internet. It meant they couldn't target audiences with as much precision on behalf of their advertisers.
Unfortunately, it has taken Snap far longer than Meta to recover from both of those challenges. The ad market improved in 2023, which helped Meta generate blockbuster financial results, but Snap's revenue ended the year flat. However, Snap is now seeing significant momentum in its 7-0 Pixel Purchase Optimization model, which leverages machine learning to target users most likely to click on an ad, with the goal to convert them in seven days as opposed to the more traditional 28-day window.
It means businesses learn more about the performance of their ads substantially faster, allowing them to pivot their strategies. Despite having a lower reach (because it's more targeted), Snap says this strategy is driving significantly more conversions. In Q1, a business called Evry Jewels saw a 150% increase in return on advertising spending and a 67% reduction in cost per action with the new optimization model compared to a similar campaign from last year without it.
Snap also continues to lead the way in augmented reality (AR). In the past, the company said more than 300 million of its users engage with AR features every day, so businesses can meet them on their level by using this technology in their ads.
Businesses can take a photo of a product, and Snap's AR Lens tool will render an AR version that can be used to create a highly engaging ad. This is a powerful feature for retailers in the clothing and accessories space, for example, because it allows users to "try on" products virtually using their smartphone camera, which drives more sales. Some brands -- even those outside of fashion -- used AR to help double their return on advertising spending recently.
Snap's revenue just grew at the fastest pace in two years
When a business sees a growing return on its marketing investment on a given platform, it's likely to spend more money -- and word gets around. Snap saw an 85% increase in the number of small and mid-sized businesses advertising on Snapchat during Q1, which helped drive a significant improvement in its financial results.
Snap's revenue came in at $1.195 billion for the quarter, representing a 21% increase from the year-ago period, which was the fastest pace of growth since the beginning of 2022. It was also comfortably above the company's guidance of $1.135 billion (at the high end of the range).
Beyond Snap's strong improvement in the advertising business, it also saw a whopping threefold increase in the number of subscribers to its Snapchat+ service. There were 9 million users on board at the end of Q1, who each pay $3.99 per month to unlock incremental features to enhance their experience.
Subscription-based revenue streams are often predictable and reliable, so continuing to grow Snapchat+ could help insulate the company from future downturns in the advertising space.
Image source: Getty Images.
The biggest reason to buy Snap stock on the dip
In my past work on Snap stock, I pointed out a very clear signal that its business could soon gather momentum: its user growth. Throughout all of the challenges the company faced over the last couple of years, it continued to add new users every quarter, which ensured it remained an attractive destination for advertisers.
In Q1, Snapchat had a record-high 414 million daily active users, which was a 10% increase from the year-ago period.
Snap's headwinds from the last two years seem to be morphing into tailwinds as the ad market continues to improve and conversion numbers on its ad platform gather momentum. Combine those factors with a record user base, and Snap could have the recipe for a sustained period of strong revenue growth going forward.
With Snap stock trading 82% below its all-time high, this could be a great time to take a long-term position.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Meta Platforms. The Motley Fool has a disclosure policy.
