Stocks to buy

Snap Stock Is Still a Buy, Despite Negative Earnings

Known for its multi-function camera app Snapchat, Snap (NYSE:SNAP) provides a dynamic social-media platform with strong appeal to younger users. Regardless, traders of SNAP stock don’t currently seem to have much conviction in the company.

An apple iPhone showing the snapchat application alongside other snapchat logos

Source: Ink Drop / Shutterstock.com

Snapchat isn’t necessarily the most popular social media platform, I’ll admit. Still, the company has embedded the app with leading-edge features like augmented reality (AR) so that it can remain competitive.

In fact, in a recent report, analysts at Jefferies declared that Snap is “beginning to successfully democratize its AR tool sets through its recently launched Lens Studio and Camera Kit.”

With an endorsement like that, you’d think that the stock would be firing on cylinders. Yet, as we’ll discuss now, there’s a major downtrend which might be unjustified.

A Closer Look at SNAP Stock

Back in September, SNAP stock was doing just fine. During that month, it rallied to a 52-week high of $83.34 — not too shabby after having started 2021 at just $50. Then, in late October, the stock took a drastic turn for the worse as it plunged from $75 to $55.

Most likely, this occurred due to investors’ negative assessment of the company’s third-quarter earnings results. We’ll definitely cover that topic, as the financial data might not justify a share-price drop of this magnitude.

In any case, SNAP stock just kept on falling, even going below $47 in early December. Granted, the broader stock market was getting shaken up due to the emergence of the omicron Covid-19 variant strain.

Still, informed investors should consider each company separately and sift through the financials with a critical eye.

Not So Bad, After All

Let’s not beat around the bush. Right now, Snap isn’t a profitable business. If that’s a deal breaker for you, I get it. However, Snap’s third-quarter 2021 fiscal results indicate that the company is making substantial progress towards profitability.

In Q3 2021, the company’s quarterly net earnings loss of $72 million while that might sound bad — it  actually represents a 64% year-over-year (YoY) improvement.

If Snap can maintain this trajectory, it’s conceivable that the company could achieve earnings break-even next year.

While we’re at it, here are a few other positive Q3 data points to ponder:

  • 306 million daily active users, up 23% YoY
  • Quarterly revenues of $1.067 billion, marking a 57% YoY improvement
  • Adjusted EBITDA totaling $174 million, signifying a whopping 209% YoY increase
  • $52 million in free cash flow, which is much better than the — $70 million reported in the year-earlier quarter

SNAP stock’s Partnership With Alphabet

So far, we’ve built a case that investors might have irrationally reacted to Snap’s financial report. Let’s not forget another angle, though: Snap is an audacious, tech-forward innovator among social-media platform providers.

Perhaps that’s why technology giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has chosen to collaborate with Snap.

Not long ago, Snap announced the imminent launch of new feature on Google’s Pixel 6, known as Quick Tap to Snap.

With this partnership, Snap is offering a camera-mode version of Snapchat that’s accessible directly from a phone’s lock screen. Moreover, this collaborative effort will enable the Pixel 6 to be the fastest phone to make a Snap.

Furthermore, the Google collaboration goes beyond Quick Tap to Snap. Reportedly, Snap and Google will launch exclusive AR Lenses. Plus, some Pixel features such as live translation, will be directly available in Snapchat’s feature on the Pixel 6.

The Bottom Line

As you can see, Snap’s alliance with Alphabet should be a win-win for both companies as well as the community of Snapchat and Pixel users.

In addition, it’s clear that Snap’s financial standing isn’t beyond repair. The company could actually achieve profitability in the near future.

So, don’t be fearful of the share-price downtrend. And if you’re tempted to panic-sell, I recommend that you snap out of it.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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