1 Growth Stock Down 85% You'll Wish You'd Bought on the Dip

Snap (NYSE: SNAP) is the parent company of social media platform Snapchat. Its stock is down 85% from its all-time high, which was set during the tech frenzy in 2021. While many of its peers also plunged following that period, Snap struggled to mount a sustained recovery.

The company's revenue growth isn't keeping pace with other social media giants like Meta Platforms, and it also continues to lose money at the bottom line. However, Snap's recent financial results for the third quarter of 2024 (which ended Sept. 30) showed measurable progress on both fronts.

Plus, one of Snap's key operating metrics is accelerating, which could bode well for its future financial results. Based on one traditional measure of valuation, Snap stock is trading near the cheapest level since it came public in 2017. Here's why that might be an opportunity for investors.

Snap has a promising innovation pipeline

Snap had difficulties adapting to the changes Apple made to its privacy policy back in 2021, which made it harder for app developers to track their users' activity across the internet. Suddenly, Snap could no longer sell highly targeted advertising slots to businesses.

But Snap has invested heavily in innovation for its advertising platform, and it's starting to pay off. For example, the company launched its 7/0 Optimization model last year, which assigns a seven-day learning period to every new ad campaign, with the budget calculated from scratch based on the results. The model is completely performance-based, as it doesn't draw assumptions from past ad spending or outcomes.

The 7/0 Optimization tool continues to deliver improving results. During Q3, Snap said advertisers saw their cost-per-purchase fall by 27% compared to past models, which means they are making more sales for every dollar they invest in marketing.

Outside its ad platform, Snap is experiencing incredible engagement in its artificial intelligence (AI) chatbot, My AI, which can do everything from answer complex questions to offer vacation ideas. During Q3, the company said the number of Snaps (messages) sent to My AI more than tripled from just three months earlier.

The company is rolling out other AI and machine learning features to encourage users to post content more frequently. Snapchat users can now instantly create AI-generated video mashups and collages, and creators can access improved video, text, and audio recognition tools to add more depth to their content. More posts on Snapchat leads to higher engagement, which in turn makes the platform more valuable to advertisers.

Image source: Getty Images.

Snap's Q3 revenue was the highest on record

Snap generated $1.37 billion in revenue during Q3, which was the best quarterly result in its history. It was a 15% increase from the year-ago period, but there were some even stronger numbers beneath the surface.

First, Snap said demand for its 7/0 Optimization model surged 160% year over year, which provided a boost to its advertising revenue. Second, the company had 12 million Snapchat+ subscribers at the end of the quarter, double the amount it had at the same time last year.

Snapchat+ members pay $3.99 per month for the ability to uniquely customize their app, and they also get early access to new features. It provides Snap with a predictable, recurring revenue stream that can help offset declines in advertising revenue during challenging periods. Based on 12 million subscribers paying $3.99 per month, Snapchat+ is on track to generate $547 million in revenue over the next year -- even if it doesn't add any new members from here.

Snap also made significant progress on the bottom line during Q3. Its net loss shrank 58% year over year and came in at $153 million, thanks to a reduced employee head count, which eliminated some salary costs and $94 million in stock-based compensation.

On a non-GAAP (generally accepted accounting principles) basis -- which excludes one-off and noncash expenses like stock-based comp entirely -- Snap delivered $132 million in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA). The company plans to continue improving this metric, which is a key stepping stone toward true GAAP profitability.

Snap stock looks cheap, especially for this one reason

Since Snap isn't profitable on a GAAP basis right now, we can't value the company based on the traditional price-to-earnings (P/E) ratio. However, we can use the price-to-sales (P/S) ratio, which divides its market capitalization by its trailing 12-month revenue.

Based on that calculation, Snap stock trades at a P/S ratio of 4.1, which is near the cheapest level since it came public in 2017, and it's also 73% below its long-term average of 15.4:

SNAP PS Ratio data by YCharts

Snap delivered strong financial results in Q3. However, the company also grew its daily active users (DAUs) to a record high of 443 million, which was a sequential increase of 11 million. That represented accelerated growth from the 10 million new DAUs it added in the second quarter of 2024, and the 8 million new DAUs it added in the first quarter.

The fact that users continue flocking to Snapchat means it will always be a relevant platform for advertisers. As a result, as tools like 7/0 Optimization improve over time, I think Snap will significantly improve its monetization, which will continue driving its revenue to new heights.

Considering the stock's current valuation, this might be a great long-term entry point for investors.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,706!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,529!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $406,486!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 28, 2024

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.