Why Snap Stock Snapped a Trend and Skyrocketed Today

The company benefited from increased user adoption and higher ad rates.

For well over a year, investors could count on shares of Snap (SNAP 27.63%) dropping after the company reported earnings. But it snapped that streak today after it reported financial results for the first quarter of 2024, and as of 12:30 p.m. ET on Friday, the stock was up a stunning 29%.

Snap finally benefiting from an ad-market recovery

Going into the quarter, Snap had guided for daily active users (DAUs) of 420 million and revenue of $1.1 billion at most. But in the first quarter, the company pleasantly surprised with 422 million DAUs and revenue of $1.2 billion, which was up 21% year over year. That’s its best growth rate in over two years.

Snap is benefiting from a couple of things right now. First, its subscription service Snapchat+ reached 9 million users in the first quarter, up from 7 million at the end of 2023. Moreover, ad rates (effective cost per thousand views) were up 8% year over year, reversing several quarters of declines.

Snap generates revenue from displaying ads. And when the cost per thousand views is up, the company makes more money for the same ad displays. This recovery is partly fueling investors’ excitement for the stock today.

Hard work left to do

I wouldn’t say that Snap has necessarily turned the corner on top-line growth and profitability. It seems that management still intends to invest heavily to stimulate better growth down the road.

In the coming second quarter, Snap only expects 15% to 18% revenue growth, a slight slowdown from first-quarter results. And the company will be spending on infrastructure and dishing out at least $1.1 billion in stock-based compensation this year.

It was a good quarter for Snap, and I appreciate the market’s positive reaction today. But with unanswered questions regarding growth and high expenses coming down the pipe, shareholders shouldn’t take a full victory lap just yet.

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