Over the past six months, Snap’s shares (currently trading at $7.79) have posted a disappointing 6% loss, well below the S&P 500’s 13.7% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Snap, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Snap Not Exciting?
Even with the cheaper entry price, we're swiping left on Snap for now. Here are three reasons why SNAP doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Snap grew its sales at a tepid 7.9% compounded annual growth rate. This was below our standard for the consumer internet sector.
2. Growth in Customer Spending Lags Peers
Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Snap’s audience and its ad-targeting capabilities.
Snap’s ARPU growth has been mediocre over the last two years, averaging 3.5%. This isn’t great, but the increase in daily active users is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Snap tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace. 
3. Low Gross Margin Hinders Flexibility
For social network businesses like Snap, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer service, data center, and other infrastructure expenses.
Snap’s gross margin is slightly below the average consumer internet company, giving it less room to invest in areas such as product and marketing to grow its presence. As you can see below, it averaged a 53.7% gross margin over the last two years. That means Snap paid its providers a lot of money ($46.28 for every $100 in revenue) to run its business. 
Final Judgment
Snap isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 15.4× forward EV/EBITDA (or $7.79 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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