Snap (NYSE: SNAP) fell in after-market trading as results did not meet investor expectations. Snap’s stock declined by 25%, and this was most likely due to losses surging to $360 million and growth slowing significantly compared to previous years. But things were not as bad as they might seem, after adjusting for one-off restructuring charges, which cost the company $155 million, the losses were much lower. The decline in the stock price could be an overreaction, but investors are far less willing to assign high valuations to stock when compared to a couple of years ago.

Snaps’s fundamentals remain intact for now, and while losses continue, DAU increased by 19%, and the average revenue per user (ARPU), was down 11%, to $3.11. The fall in ARPU should not be surprising, it’s been noted that advertisers have become a lot of discerning when allocating funds to social media, and Snap is no exception. Advertisers in recent times have been re-assessing the return on investment from various mediums, and whether it makes sense to allocate advertising dollars at the rate that they have in previous years.

Taking another look at Snaps' fundamentals

But another factor driving ARPU growth lower is the increasing number of users from the ‘rest of the world. The rest of the world's users increased by 34%, compared to 4% in North America. The increasing proportion of users not from North America means that ARPU will face headwinds since these users tend to bring in lower revenue. But on the other hand, these users also tend to have a brighter future in terms of growth and will help push growth along for a much longer time.

“Our revenue growth continued to decelerate in Q3 and continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition,”-  Statement by Snap to investors.

Snap also recently announced that they will be laying off 20%, of their staff as a plan to restructure their business. The layoffs will mostly affect business divisions that are no longer active, but the core of Snap’s business is unlikely to be affected. The reduction in headcount should help Snap focus on its main business, around which it is planning a number of social media moves.

Snap’s management did mention that moving forward things should get better as Q4 revenue tends to be disproportionate in terms of generating revenue, and therefore, Q3 results should be taken within a broader context. Snaps' fundamentals remain intact, but it has been facing headwinds from both the demographics of its user baser, which tends to be younger and macroeconomic headwinds, which are now clearly affecting marketing budgets.

Snap outlined a number of key points including increasing user engagement. Users over 35 increased their viewing time by 35% when it came to the platform's shows and content. Meanwhile, the total time spent watching Spotlight increased by 55%. While these numbers will make investors happy, Snap is still going to be contending with increasing competition from a number of different platforms including Instagram and TikTok. Not to mention historically social media platforms, have all eventually waned in terms of user engagement, which is something the market will continue to watch out for.

Since Snap does not have earnings, a lot of investors have been looking to metrics such as price-to-sales to gauge whether the company is valued correctly. Snap’s P/S fell to 3x, as revenue growth did not come in at the rate at which they had hoped. While the valuations continues to become cheaper, investors are also not as forgiving as they used to be. Excluding restructuring charges, adjusted EBITDA fell to $72 million, declining from $174 million during the same quarter in 2021. One of the line items that will continue to be controversial is stock-based compensation, which came in at $312 million, excessive stock-based compensation has been a serious problem for tech stocks, and investors are not likely to be amused, especially when the company has not had any net profit. But despite the losses, free cash flow remains positive, coming in at $18 million, with operating cash flow at $56 million. Therefore, Snap is likely to be profitable again from the next quarter, as some of the temporary line items fall off.

Snaps' future remains steady for now, and while macro headwinds are affecting the stock, the broader fundamentals, remain intact. There is plenty of room for Snap to grow its user base, but investors will continue to watch how much revenue the incremental users bring in. Until then the stock is likely to be under pressure. But, short-term sentiment aside, any good news is likely to result in a rally once again.