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Snap stuns Wall Street, finally beats earnings

Illustration: Axios Visuals

Snap Inc. announced Tuesday that it beat Wall Street predictions on earnings and revenue last quarter, surprising investors that had modest expectations for the company. It also added 9 million new daily active users (DAUs) — the highest number of quarterly net adds since the third quarter of 2016.

Why it matters: Snapchat had a difficult first year as a public company, missing growth expectations as it faced competition from Instagram and Facebook. Tuesday's success, demonstrated by major stock gains, is reviving investor confidence in the company — at least for now.

The big question for Snapchat: whether Wall Street can count on the seven-year-old "camera company," whose stock has plummeted over 40% since going public for $20 billion last year, to continue its path towards sustainable growth.

“Earnings were very positive for Snap, but they met a bar that was severely lowered. The question becomes: Has the bar been lowered enough to where this becomes normal vs. an outlier?”
— Rich Greenfield, TMT Analyst at BTIG

Investors see potential in Snapchat as an early-stage company, so long as it can continue to develop its nascent advertising business and grow its user base.

  • “They brought in $825 million last year, but can they increase revenues to $1.3 billion or more this year (where the bar is set)?” Greenfield asks. “We just don’t know. I don’t have conviction there.”
  • Executives admitted Tuesday that it expects year-over-year revenue growth this quarter to be moderate compared last quarter, due to seasonal peaks in the fourth quarter.

Snapchat says 90% of its ads are now sold programmatically, or in an automated fashion. It's a huge feat for the company that has been unable to generate profit while investing millions to ramp up its advertising technology in a short period of time.

Still, the cost of those ads are relatively low because demand is low, and it will need to create a more competitive “auction” for ads if it wants to drive significant revenue growth.

  • Facebook Q4 2017 average revenue per user in North America: $26.76
  • Snapchat Q4 2017 average revenue per user in North America: $2.75

A bright spot for Snapchat is that it grew its daily active user base in North America — the most lucrative digital advertising market in the world — by roughly 18% year-over-year. Facebook, which has much higher market penetration, only grew its daily active user base in North America by nearly 2% year-over-year.

A redesigned version of the app will roll out to all users in Q1, Snapchat CEO Evan Spiegel told investors Tuesday. It was supposed to come out late last year.

  • Spiegel admitted last quarter that the app was hard to use, slowing user growth.
  • Wall Street will look to see how the redesign affects how much users engage with Discover moving forward. “
  • It seems like that is where a huge revenue opportunity lies,” Greenfield says.

Even though the redesign roll-out is slightly behind, there’s evidence that some changes are helping to reengage users:

  • Spiegel said last quarter that the company is building a new version of its mobile app on Android from the ground up.
  • Snapchat says the retention rate of new Android users increased by nearly 20 percent when compared to last year.

Go deeper: Snap paid media publishers $100 million last year

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