Instantaneousit is (INSTANTANEOUS -39.08%) the stock fell 27% during after-hours trading on Thursday, July 21, following the release of the social media company’s second-quarter earnings report. Its revenue rose 13% year-over-year to $1.11 billion, which missed analysts’ estimates by about $20 million.

Last May, Snap had already warned investors that its second-quarter revenue would be “below the bottom end” of its earlier forecast for growth of 20-25% amid tough macroeconomic challenges.

Snap’s net loss also fell from $152 million to $422 million, while its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) fell 94% to just $7 million. Nonetheless, its non-GAAP (Generally Accepted Accounting Principles) loss of two cents per share still exceeded Wall Street expectations by a penny.

Snap’s daily active users (DAUs) still grew 18% year-over-year to 347 million, but its average revenue per user (ARPU) fell 4%. These results look dismal, but six more red flags indicate that it’s still too early to consider the battered social media stock a turnaround.

1. More tips

Snap typically provides guidance on its quarterly revenue and adjusted EBITDA, but declined to do so for the third quarter due to “uncertainties in the operating environment.”

Specifically, Snap is still grappling with Appleit is (AAPL -0.81%) privacy changes on iOS, headwinds from the Ukraine War, and COVID-19 related disruptions in some markets. Inflation and rising interest rates have exacerbated this pain by limiting digital ad purchases around the world.

Snap’s cautious outlook isn’t surprising, but it previously told investors it could achieve “over 50% revenue growth” for “several years” during its Investor Day presentation last February. . But this chart illustrates Snap’s growth trajectory since setting that lofty goal:

Data source: Snap. YOY = year after year.

2. Refuse to give up that 50% goal

During the conference call, Snap was asked if that 50% target was still on the table. Instead of answering the question, CFO Derek Andersen said that while Snap faces short-term headwinds, it could still be “positioned well over time” as it rolls out new features and grows. extended abroad.

Analysts expect Snap’s revenue to grow about 22% to $5.03 billion for the full year and another 32% to $6.63 billion in 2023, but those estimates are likely to be reduced after its last earnings report.

The responsible thing to do would be to simply backtrack on his 50% target (and endure some pain now) instead of stubbornly sticking to it and undermining investor confidence in his long-term plans.

3. Suspend membership growth

During the call, Andersen also said that Snap would “effectively halt” its workforce growth. The move could help it rein in its costs and expenses, which jumped 29% year-over-year to $1.51 billion in the quarter, as well as employee-based compensation expenses. equities, which engulfed 29% of its total revenue.

However, controlling its spending could also make it harder for Snap to roll out new features and keep pace with fierce competitors such as ByteDance’s TikTok and Metaplatforms‘ (META -7.59%) Instagram.

4. Deterioration of cash flow

Snap generated negative free cash flow (FCF) of $147 million in the second quarter, compared to negative FCF of $116 million a year earlier.

Snap won’t run out of cash anytime soon, as it still had $4.9 billion in cash, cash equivalents, restricted cash and marketable securities at the end of the quarter. But it’s still bleeding – and its high debt-to-equity ratio of 1.6 doesn’t leave it too much room to raise new funds.

5. A $500 million buyout

It’s a bright red flag when an unprofitable company with a negative FCF allows a big buyout. That’s precisely what Snap did by abruptly authorizing a $500 million buyout for its Class A shares.

Snap says the buyout, which will last for the next 12 months, will offset “some of the dilution associated with issuing restricted stock units to employees.” Therefore, this buyout is actually a sign of weakness instead of strength – and it won’t make the company’s stock cheaper.

6. An unnecessary stock split plan

Finally, Snap has pledged to issue a stock split in the form of a dividend of one Class A share for each share then outstanding if the Class A share reaches $40 within the next 10 years. . This move, which is primarily intended to allow its founders to sell more Class A shares instead of their exclusive tier of Class C shares (which are worth 10 votes each), makes no sense and just appears to be a vain attempt to jump on the bandwagon of stock splitting. .

All of these issues suggest that Snap is in serious trouble. Investors looking for a more resilient social media game should take another look at Meta, which may have a better chance of a long-term recovery.