Snapchat: Don't Rush to Buy This Social Media Stock

It's been a tough ride for long-term Snap (NYSE: SNAP) investors. Once touted as a close rival to Meta Platforms' Instagram, the relatively small social media company remains unprofitable and is down by more than 30% year to date. Investors who are betting on a turnaround may want to cut their losses and review other investment opportunities.

Growth is slow and profits are nonexistent

Snap's revenue trajectory does not reflect what investors have come to expect from unprofitable, high-stakes companies. The social media company only has an annualized 8.8% revenue growth rate over the past three years. That's much lower than Meta Platforms' 19.9% compound annual growth rate (CAGR) over the same stretch.

It's impossible to even compare the two tech companies anymore. A few years ago, investors would look at Snap's earnings to gauge how Meta Platforms would perform, and vice versa. Few investors do that anymore. Meta Platforms earned more than $200 billion in revenue over the past year, while Snapchat generated less than $10 billion over the same stretch.

Image source: Getty Images.

The better comparison is Pinterest, but even then, it grows faster and actually makes a profit. Snap reported an $89 million net loss in the first quarter. It's still unprofitable almost 15 years after its launch, but it's not posting the type of revenue growth that warrants waiting for a flip to profitability.

Snap has limited ways to fuel meaningful improvements

Snap wrapped up Q1 with 956 million monthly active users, up 5% year over year. The company touted it as a win and a return to positive monthly active user growth. However, Snap must increase its average revenue per user to maintain its status as a growth stock, but it hasn't made sizable progress on that front.

Sponsored Snaps were a bright spot, as that segment generated a 226% year-over-year increase in per-impression clickthrough rates, but 12% overall revenue growth is nothing to write home about for a company that lacks profitability.

Snap's outlook suggests Q2 revenue of $1.535 billion, a 14.6% year-over-year increase. That's good, but it also suggests flat sequential growth. Revenue isn't budging by much quarter over quarter.

Meaningful growth rates remain an issue, and Snap is competing with social media giants that are gaining market share faster. Instagram and TikTok are both more popular than Snapchat. Users are gravitating toward those apps, and advertisers are following consumers.

Strong competition and a history of low growth rates don't bode well for Snap shareholders. Perhaps investors would be more patient with Snap if it were producing 20% to 30% year-over-year revenue growth at this stage, as Meta Platforms is doing right now.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Pinterest. The Motley Fool has a disclosure policy.