Snap Crackles and Pops on Surprise Profit and Raised Guidance

Key Points

• Social media operator Snap recorded a surprise profit of 3 cents in Q1 2024, crushing consensus estimates for a loss of 3 cents by 29 cents.
• Daily active users (DAUs) rose 10% YoY to 422 million, and Snapchat+ premium membership tripled to more than 9 million subscribers.
• Snap raised its Q2 2024 revenue guidance to $1.225 billion to $1.255 billion, above $1.22 consensus estimates, and DAU is expected to reach 431 million.

Snap Inc. NYSE: SNAP investors are rejoicing after the company reported a surprise profit in its Q1 2024 earnings report. The company also raised its outlook for Q2 2024 as a cherry on top. After disappointing investors for the past several quarters, expectations were low. This set up a perfect storm when the company took everyone by surprise on a number of solid metrics. The computer and technology sector companies surged over 30% the following day as bears scrambled and bulls dived back in.

Meta Platforms Set the Bar Low, But Google Raises It.

Just the day before Snap's earnings, social media bell weather Meta Platforms Inc. NASDAQ: META reported its earnings and suffered a 10% drop in reaction. This drop caused Snap investors to assume the worst, as sympathy selling caused a gap down the following morning. Meta Platform reported very strong results.

What scared investors was the magnitude of the jump in capex spending the company announced as the "Year of Efficiency" seems to have ended and replaced with heavy capex spending (again). This time, Meta noted that it is ramping up capex for its artificial intelligence (AI) application LLAMA3, not the Metaverse. Prudent investors took the opportunity to buy the dip in Snap as shares rallied nearly 3% on the day heading into the earnings report.

Alphabet Inc. NASDAQ: GOOGL followed up with stellar earnings and strong advertising growth the following day, thereby lifting the bar again.

Daily Rectangle Pattern

SNAP's daily chart illustrates a rectangle pattern that formed since its previous earnings gap down of 34% on February 7, 2024. The $12.39 gap fill marks the upper flat-top trendline of the rectangle, and $10.54 is the lower flat-bottom trendline. SNAP traded between the trendlines for three months heading into its Q1 2024 earnings report. The blowout report resulted in a 30% gap up the following morning, marking $13.78 as the new upper gap fill. The daily relative strength index surged through the 70-band. Pullback support is at $13.78, $12.39, $11.55 and $10.54.

Snap Crackles and Pops on Unexpected Profits

Snap reported Q1 2024 non-GAAP EPS of 3 cents versus consensus estimates for a loss of 26 cents, beating estimates by 29 cents. The net loss was still $305 million vs. $329 million in the year ago period. Adjusted EBITDA was $46 million versus $1 million last year. Revenues surged 21% YoY to $1.2 billion versus $1.12 consensus estimates. It's worth noting that the comparison to Q1 2023 was a low bar since it was the first quarter that Snap had reported a revenue decline.

North American revenues saw 16% YoY growth, expanding 14 points higher QoQ. Rose of World (ROW) and Europe grew at a faster pace due to the adverse impact of the Middle East conflicts in the quarter.

Raises Q2 2024 Guidance

Snap guided up Q2 revenues to $1.225 billion to $1.255 billion versus $1.22 billion consensus estimates. DAU is expected to grow to 431 million, and adjusted EBITDA is forecast between $15 million and $45 million.

Blame it on the Advertising.

Snap makes most of its revenues on advertising. Investors have waited with bated breath for the digital advertising slump to rebound, and it appears that it's underway. Advertising revenues rose 16% YoY to $1.11 billion. Snap had continually talked about restructuring its advertising platform as investors grew weary of the excuses. The cumulative effect triggered in this quarter is highlighted by the 31% YoY jump in total adjusted cost of revenues.

Cost Cuts Went to the Bottom Line

Snap has undergone a stringent cost-cutting initiative as it cut 20% of its workforce in late 2022 and further cut another 10% of its headcount in its announcement in February 2024.

CAPI Improvements

Snapchat launched its new and improved version of Conversions API (CAPI) to all advertisers, which simplifies set up with less integration times. Snap partnered with Snowflake Inc. NYSE: SNOW to enable advertisers to use CAPI solutions without having to build a bespoke backend integration. The CAPI improvements have led to 300% YoY growth in CAPI integrations.

Rebound in the SMBs

Snap saw an 85% rise in active advertisers from small and medium-sized businesses (SMBs). Direct response ads drove the surge in SMB growth as this group favors this type of advertising, which actually forces users to respond and provide feedback.

Artificial Intelligence (AI) and Machine Learning (ML) Investments Paying Off

Snap ramped up its AI and ML investments to support the direct response and brand-related ad platform, which saw ad revenues rise across all regions in the quarter. Snapchat+ subscribers tripled YoY, passing 9 million subscribers in the quarter. Continued investment in Generative AI models and automation to create ML and AI Lenses increased AI Lenses viewed by over 50% YoY. Snap also implemented a new AI assistant in Lens Studio to answer developer questions and guide developers through tutorials to build Lenses more easily.

Users Continue to Grow

Daily active users (DAUs) rose 10% YoY to 422 million, an increase of 39 million users, beating analyst estimates by 1 million users. A DAU is interpreted as a registered Snapchat user who opens the Snapchat app one or more times during a defined 24-hour period. Average DAUs are calculated by taking the total DAUs each day divided by the number of days in the quarter.

Snapchat reaches over 75% of the 13 to 34-year-old market in 25 countries, comprising more than 50% of the global ad market. Revenues per user also jumped 9.7% YoY in the quarter but fell 14% QoQ.

Upbeat CEO Comments on the Top Happiest Platform

Snap CEO Evan Spiegel noted that Snapchat is ranked as the number one happiest platform, as 90% of its users say they feel comfortable and happy when using the platform. Spiegel talked up the success of its advertising platform, "In Q1, ongoing momentum with our 70-pixel purchase optimization model led to a more than 75% increase in purchase-related conversions year-over-year. In addition, we are excited by the progress we're seeing with our small and medium-sized advertising partners."

Spiegel noted that content creators and SMBs can promote their content and products with just a few taps on the Snapchat application. This has been the driving force behind the 85% YoY growth in SMB Snapchat advertisers. He pointed out that over 300 million people are engaged with augmented reality (AR) products daily, which is driving innovation.

Spiegel concluded, "We believe that our large and growing community, an innovative and engaging service that continues to evolve, and a strong balance sheet with positive free cash flow positions us well to achieve our long-term vision for augmented reality, which we believe will be one of the most meaningful advancements in computing that the world has ever seen."

Analyst Upgrade

On April 26, 2024, HSBC upgraded shares of SNAP to a Buy from Reduce. Snap analyst ratings and price targets are at MarketBeat.