Shareholders of Snap would probably like to forget the past six months even happened. The stock dropped 47.6% and now trades at $4.04. This might have investors contemplating their next move.

Following the drawdown, is this a buying opportunity for SNAP? Find out in our full research report, it’s free.

Why Does Snap Spark Debate?

Founded by Stanford University students Evan Spiegel, Reggie Brown, and Bobby Murphy, and originally called Picaboo, Snapchat (NYSE: SNAP) is an image centric social media network.

Two Things to Like:

1. Outstanding Long-Term EPS Growth

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Snap’s EPS grew at 27.9% compounded annual growth rate over the last three years, higher than its 8.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

2. Increasing Free Cash Flow Margin Juices Financials

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Snap’s margin expanded by 6.2 percentage points over the last few years. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Snap’s free cash flow margin for the trailing 12 months was 7.4%.

One Reason to be Careful:

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 4.8%. 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.

Final Judgment

Snap’s merits more than compensate for its flaws. With the recent decline, the stock trades at 7.7× forward EV/EBITDA (or $4.04 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.

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