Snap stock jumped nearly 30% in Friday trading, after Snapchat’s parent company reported first-quarter earnings that easily beat expectations. The 21% revenue growth represents what one analyst called a “massive re-acceleration” of the social media business.
He explains How Snap is shifting from its foundation in augmented reality to relying on AI and how the company is refocusing its advertising efforts to improve revenue.” vid-name=”Can Snap Catch Meta? How a social media platform is harnessing AI to improve its revenue picture” vid-cat=”Industry Insights” vid-date=”02/15/2024″ vid-date-tmsp=”1707998918″ vid-image=”https:/ /www .investors.com/wp-content/uploads/2024/02/XgDAWzGT-640×360.jpg” vid-authors=”Meredith Hyman”>
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In the results published late Thursday, the Santa Monica, California-based newspaper reported pop (popIt said it had adjusted profit of 3 cents per share on sales of $1.2 billion for the quarter ended in March. On average, analysts expected Snap to report an adjusted loss of 5 cents per share on sales of $1.12 billion, according to FactSet.
In the same period last year, Snap earned 1 cent per share on an adjusted basis on sales of $988.6 million.
For the current quarter, Snap Targeted for sales of $1.24 billion at the midpoint of its range. Heading into the report, analysts expected Snap to generate sales of $1.22 billion for the quarter ending in June, according to FactSet.
In today’s stock market, Snap The stock rose more than 27% to close at 14.53.
Snap’s revenues are accelerating dramatically
The results represent a significant acceleration in Snap’s revenue growth. Sales grew by 5% year over year in the company’s December quarter and by 5% in the period ending in September. After the December quarter, Snap’s meager revenue growth led to some unpleasant comparisons with… Meta platforms (dead), the largest and fastest-growing company behind Facebook and Instagram.
Snap and Meta get almost all of their revenue from selling digital ads.
Snap’s sales growth appears to have finally recovered from the digital ad market decline that began in 2022. The 21% growth in the March quarter is Snap’s highest in two years.
In a letter to shareholders, Snap executives said revenue growth was “improving faster than we previously expected.”
The company credited the improvements it made to its advertising platform with the increased demand for direct response ads. Direct response ads are designed to elicit a response from a user, such as clicking directly on a product page for an e-commerce business. Snap has focused on this category to drive growth.
Snap’s shareholder letter also highlighted Snapchat+’s growth. The subscription product provides access to exclusive app features for $3.99 per month. The company said the number of paying users tripled year-on-year to 9 million.
Meanwhile, Snapchat’s daily active users increased 10% year over year to 422 million. The company says it expects to reach 431 million users by the end of June.
The midpoint of Snap’s sales guidance for the June quarter would represent an increase of approximately 16% from a year earlier. Snap officials noted in the company’s shareholder letter that it faces a tougher year-over-year comparison with the current quarter, among other seasonal factors.
Wall Street’s response to stock surprise
Analysts mostly raised their targets for Snap after the report.
“We believe a dramatic re-acceleration in revenue growth and above consensus Q2 review guidance should help bolster the bullish case for the stock,” Jefferies analyst James Heaney wrote in a note to clients on Thursday. “Based on the improvements made to the advertising platform, we believe the Q2 review guidance implying deceleration points of 3% to 6% versus Q1 is conservative.”
Heaney reiterated a buy rating on Snap and raised his price target to 19, from 17. He emphasized that the company posted 85% year-over-year growth in SMB spending on Snapchat.
However, many on Wall Street appear to be approaching the positive reaction with some caution.
For example, Stifel analyst Mark Kelly raised his price target to 13 for Snap stock, but maintained a Hold or Neutral rating. “We will remain on the sidelines until we have a better handle on a more predictable revenue run rate,” Kelly wrote.
Jason Helfstein, an analyst at Oppenheimer, also remained neutral on the stock. He noted that the number of daily active users of Snapchat was flat quarter-to-quarter in North America and Europe.
“All of the growth remains in the rest of the world, where monetization is weaker,” Helfstein wrote to clients on Friday.
Average revenue per user in North America was $7.44, as of Q1. This compares to an average revenue of US$2.04 per user in Europe and US$1.13 per user in other regions.
Snap Stock: Technical Reviews
Even with Friday’s spike, Snap has a big hole to climb out of. Shares remain down roughly 10% year-to-date and more than 80% below their all-time high reached in September 2021.
Coming into the earnings report, Snap stock had an IBD Composite Rating of 31 out of a top 99, according to IBD inventory check. The score combines five separate property ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
However, Snap’s IBD Relative Strength Rating was 25 out of 99, indicating significant underperformance compared to the rest of the market.
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