Snap's Margin Gains Highlight Profitability Progress but Underlying Ad Weakness Persists

What happened

Snap's Q4 results showcase a profit inflection, with gross margin rising to 59% sequentially and targeting above 60% in FY26, while adjusted EBITDA hit $358 million with 51% incremental flow-through and free cash flow reached $206 million. The DeepValue report, however, frames Snap as a 'WAIT' due to mid-single-digit ad growth, eCPM declines of 13% YoY, and stagnant North America large-brand revenue at just 1% YoY growth in Q3 2025. Beyond the optimistic headline, these margin improvements likely stem from cost discipline and operating leverage rather than revenue acceleration, masking ongoing competitive pressures and share loss to rivals like Meta and TikTok. Key risks such as dependency on the one-off Perplexity partnership and regulatory overhangs remain unresolved, with the report highlighting that Snap trades at 50-55x 2024 FCF with limited margin of safety. Thus, while profitability is strengthening, the core investment thesis still hinges on durable double-digit revenue growth and North America stabilization, which are not yet evident.

Implication

The improved margins and cash flow provide a financial buffer, but Snap's high valuation relative to FCF and persistent GAAP losses limit upside potential without revenue re-acceleration. Operating leverage signals scalability, yet this depends on reversing North America ad revenue stagnation and eCPM compression, which remain headwinds amid intense competition. Free cash flow strength supports debt management, but the company's net debt position and ongoing investment needs in AR and AI constrain balance-sheet flexibility. The Perplexity deal adds near-term revenue diversification, but its impact is contracted and lacks proof of long-term monetization or engagement uplift. Until Snap delivers sustained ≥10% YoY revenue growth for multiple quarters, as outlined in the DeepValue report, the risk-reward favors waiting rather than buying, aligning with the current 'WAIT' rating.

Thesis delta

The new profit data reinforces Snap's ability to generate cash and improve margins, which is a positive development but does not alter the fundamental thesis. Core issues such as weak North America ad demand, competitive pressures, and reliance on one-off partnerships remain unchanged, requiring clearer evidence of revenue acceleration. Therefore, the recommendation stays at 'WAIT', with no shift in the investment call until durable double-digit growth is demonstrated.