Snap (NYSE: SNAP) faced a series of challenges over the last few years. Many of them originated from an adjustment to Apple's privacy rules in 2021, which made it difficult for app developers to track their users across the internet. It meant Snap could no longer sell highly targeted advertising slots to businesses on its social media platform, Snapchat.
Snap wound up with stagnant growth across its business, but after some significant innovations, the company appears to be on track once again. It just reported its financial results for the 2024 full year, and it delivered accelerating revenue growth, surging profits, and a record high user count.
Snap stock remains 86% below its all-time high from 2021, but here's why it might be a great buy for 2025 (and beyond).
Image source: Getty Images.
Advertisers are flocking to Snapchat
Snap made a series of changes to its advertising platform post-2021, which included some innovative workarounds for Apple's disruptive privacy changes. But the company is also focusing more on direct response ads, which prompt users into a specific action like clicking a product link or downloading an app. This is helping businesses yield tangible outcomes from their ad spending on Snapchat, instead of simply driving brand awareness.
One of Snap's new innovative tools is the 7/0 Optimization model. It assigns a seven-day learning period to new ad campaigns, and the budget is determined by the results, meaning the model is entirely performance-based. This prevents businesses from burning ad money on campaigns that aren't effectively reaching their target audience. Plus, it produces valuable data on which users are likely to take action, so they can be targeted again.
Snap says that one business called GoWish (a digital wish list platform) recently yielded a 70% reduction in the cost-per-install for its app, with a 3,000% increase in downloads over a 12-week period, by running ads with 7/0 Optimization.
Snap's overall focus on direct response outcomes is attracting flocks of small and mid-sized businesses, contributing to a doubling of the total number of active advertisers on its platform during 2024. Snap also caters to them with other tools like Promote, which allows them to create ads using content in their profile and track their performance, all from a smartphone device. This is especially useful for businesses that don't have dedicated marketing personnel.
Accelerating revenue growth, and soaring profits
Snap generated a record $5.3 billion in total revenue during 2024, which was a 16% increase from last year. It was the fastest growth rate since 2021, and it also represented an acceleration from the company's flat result in 2023.
Snap's improving ad business was the key driver behind the strong result, but the company also reaped the rewards from its efforts to create diversified revenue streams. For instance, it launched the Snapchat+ subscription service in 2022, which gives users early access to new features and allows them to customize their in-app experience, all for just $3.99 per month.
Snapchat+ had 14 million subscribers at the end of 2024, which was double the amount it had at the end of 2023. It represented the lion's share of Snap's "other" revenue, which soared by 131% last year. The company says the subscription service has now reached an annual revenue run rate of $500 million.
Snap's solid top-line results also translated into a strong improvement at the bottom line during 2024. The company still lost $697.8 million on a GAAP (generally accepted accounting principles) basis, but that was a 49% reduction from its 2023 loss of over $1.32 billion.
On a non-GAAP basis, which strips out one-off and non-cash expenses like acquisition costs and stock-based compensation, Snap was actually profitable in 2024 to the tune of $487.1 million -- a whopping 238% jump compared to 2023.
Snap stock is near the cheapest level in its history
Since Snap isn't profitable on a GAAP basis, its stock can't be valued using the traditional price-to-earnings (P/E) ratio. Instead, we can use the price-to-sales (P/S) ratio, which divides a company's market capitalization by its annual revenue.
Snap's P/S ratio is currently 3.7, which is near its cheapest level since it became a publicly traded company in 2017. It's also significantly below its peak of more than 60 (which was an unsustainable valuation).
Snap's current P/S ratio also makes it far cheaper than its main rivals in the social media industry, Meta Platforms and Pinterest. Meta is benefiting from a sharp pivot toward artificial intelligence (AI) development, which is one reason its valuation is commanding a steep premium to its social media peers right now.
Snap finished 2024 with a record 453 million daily active users, and that number continues to grow consistently each quarter. As long as Snapchat continues to attract new users, it will always be a valuable destination for advertisers seeking a young, engaged audience. Further improvements in its ad platform will only help the company monetize each user at a higher rate, which will supercharge its revenue growth over the long term.
Snap stock might be a great buy right now, but investors with a long-term time horizon of five years or more could do especially well, because it will give the company sufficient time to build on its recent momentum.
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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, Meta Platforms, and Pinterest. The Motley Fool has a disclosure policy.
