What Happened: Shares of social network Snapchat (NYSE: SNAP) jumped 27.5% in the afternoon session after the company reported first-quarter results with revenue beating expectations, driven by better-than-expected daily active users. Its revenue growth and higher operational efficiency also enabled it to post positive EBITDA and free cash flow, beating Wall Street's pessimistic estimates.
The company noted strong momentum in its Snap Star program, which seeks to bring social media influencers into its platform to drive engagement. This helped contribute to a tripling of Snapchat+ subscribers and 125% year-on-year growth in total time spent watching Snapchat Spotlight content. The number of small- and medium-sized businesses advertising on Snapchat also grew 85% year on year.
Lastly, next quarter's revenue, EBITDA, and daily active users guidance surpassed estimates. It expects to have 431 million daily active users.
Overall, this was a strong quarter that should satisfy shareholders.
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What is the market telling us: Snap's shares are somewhat volatile and over the last year have had 18 moves greater than 5%. But moves this big are very rare even for Snap and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock dropped 34.5% on the news that the company reported fourth-quarter results with revenue and average revenue per user (ARPU) missing analysts' expectations amid elevated expectations around changes in the direct response business. User growth was steady, with DAU (daily active users) ahead of estimates as net additions in Europe and the Rest of the World more than offset the customer attrition recorded in North America.
This North America attrition is sure to ring alarm bells about competition, with Meta (NASDAQ:META) recently reporting very encouraging results. While next quarter's revenue guidance was in line, adjusted EBITDA guidance was well below. This shows that Snap's growth is coming at higher costs or less efficiency than expected. Moreover, the ARPU miss and the weakness in North America DAU indicate a challenging road ahead if the company aims to surpass expectations in the upcoming quarter. During the earnings call, management hinted at potential growth investments in North America and Europe and expressed optimism about avoiding further declines in North America in Q1.
Overall, this was a mediocre quarter for Snap as the market was likely expecting more, considering the strong result reported by Meta earlier in the season.
Snap is down 7.6% since the beginning of the year, and at $14.91 per share it is trading 14.6% below its 52-week high of $17.45 from February 2024. Investors who bought $1,000 worth of Snap's shares 5 years ago would now be looking at an investment worth $1,366.
