Snap share price continues growth following blow-out Q3 earnings report

Last week, Snap reported third-quarter results that smashed Wall Street estimates. What does that mean for the Snap share price?

On 20 October, Snap Inc. (Snap) reported third-quarter results that smashed Wall Street estimates. Snap Inc. (Snap) saw revenue climb 52% year-over-year to $678 million (£518 million) in Q3, $127 million (£97 million) above estimates, and also beat expectations in earnings.

The impressive results were reflective of a vast increase in the platform’s users during the last year, as well as a renewed strength in the advertising market this quarter.

Shares in Snap have seen sustained growth since the announcement and now trade at $38.97 (£29.78) – a two-day increase of 37%.

Enhanced experience drives user growth

It appears that with more time at home during the pandemic, people have spent more time on Snapchat.

Snap reported that the social media platform had added 11 million daily active users this quarter, taking the overall number of Snapchat users globally to 249 million. The company estimated that the Snapchat platform now reaches over 90% of the generation Z population and 75% of the generation Z and millennial population in its established markets such as the US, UK and France.

However, it is not just these markets in which the social media platform is flexing its muscles. Snap also announced that it has witnessed strong growth in new, emerging markets. The company reported that Snapchat Discover viewership (the section of the Snapchat app which displays news on current events, pop culture and more) grew 50% this year in India, for example.

The company believes growth in its community of users around the globe can be partly attributed to the commitments it has made in embracing new technologies, such as augmented reality, which have added another dimension to the Snapchat user experience.

The emphasis the management team of Snap place on adopting new technologies should be most encouraging to investors. In what is a congested social-media sector, Snap is reaping the benefits of its continued desire to innovate, and it is likely that these investments will continue to drive the company’s growth and profitability in the future.

Renewed life in the advertising space

As well as a boost in user engagement, Snap witnessed a bounce-back in advertising demand from depressed levels during the first half of the year.

As its main source of revenue, advertising is of paramount importance to the financial performance of Snap. The company generated $679 million (£518 million) in revenue this quarter, and Snap’s eCPM, which can be interpreted as a barometer of average ad revenue, rose 20% year-over-year. This is the first time since Snap listed as a public company that it has seen its eCPM increase in a quarter.

This is reflective of the confidence advertising companies have in Snap’s services and the innovative changes the company has implemented during the past quarter.

Additionally, the return of sports leagues and pop-culture have hugely boosted advertising revenues, as the community has watched much of the action on Snapchat Discover. Sports channels such as the NBA highlights channel and Sportcenter saw increases in engagement of 20% and 80% respectively since the start of the third quarter.

The news of a rebound in advertising spending has been received well by the market, with shares in other technology companies Twitter, Facebook and Google increasing 8%, 4% and 3.5% respectively.

An eye to the future

Snap’s market capitalisation has risen $13 billion (£9.93 billion) since the news on Wednesday to $56.39 billion (£43.09 billion). Whilst the company operates in a competitive sector, where advertisers can choose from social-media giants such as Facebook and Twitter, recent results provide evidence of advertisers’ willingness to utilise alternative platforms.

Although this has been boosted by many advertising groups’ boycott of Facebook in July due to the company’s political stance and content moderation, Snap’s continued innovation should continue to persuade advertisers to utilise its platform.

The operating conditions globally due to the coronavirus pandemic pose risks to almost every business in the world, and Snap is no different. A lift of lockdown and the return of pop-culture and sports have been crucial to Snap’s growth this quarter. The reimposing of further lockdowns and the disappearance of these things would therefore hurt the company in the short-term.

The company’s valuation may also intimidate investors, given Snap still posted a net loss of nearly $200 million (£152 million) for the quarter. However, the group requires extensive investment in content and technology to drive future profitability. One only needs to look at Netflix’s rapid evolution from losses to profitability to see the possibilities ahead of Snap.

Its management is confident in the investments they continue to make in the future of the business, and it appears Wall Street is too. The company is currently rated as “overweight”, with 25 buy ratings and only 1 sell rating, according to the WSJ.

Snap still has some time to go before it can turn losses into profit, and is likely to witness volatility in its share price in the short-term. However, Snap’s business model continues to attract users and advertisers alike, and appears an exciting investment for the long run.