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Snap Inc. (SNAP): Earnings Preview Amid Advertising Market Challenges and AI Investments

Jay's InsightTuesday, Oct 29, 2024 4:05 pm ET

2min read

FDS -- META -- SNAP --

Snap Inc. (NYSE: SNAP) is set to release its third-quarter 2024 earnings after the market closes today, with an earnings call scheduled for 5:00 p.m. ET. Investors are keenly awaiting the results, especially in light of recent headwinds in the advertising market and increased competition from industry giants like Meta Platforms (META).

Earnings Expectations

According to FactSet Consensus estimates, Snap is expected to report an earnings per share (EPS) loss of ($0.14) on revenue of $1.36 billion for the quarter. This guidance aligns with the company's previous outlook, where it projected third-quarter revenue between $1.335 billion and $1.375 billion. To meet market expectations for the fourth quarter, Snap will need to guide for revenue of $1.56 billion.

Performance Overview

In the second quarter, Snap barely surpassed EPS estimates, marking a departure from its history of routinely exceeding expectations by wide margins. Revenue growth decelerated to 15.8%, down from 20.9% in the prior quarter. This slowdown was primarily attributed to a broader pullback in the advertising market, a trend also observed in companies like Alphabet (GOOG) and Pinterest (PINS).

Snap appears to have lost advertising market share to Meta Platforms, which has leveraged advancements in artificial intelligence to deliver stronger returns on investment for advertisers. Meta's focus on AI has enhanced its advertising effectiveness, making it a more attractive platform for advertisers seeking better performance.

Key Metrics and User Engagement

Daily Active Users (DAUs) remain a critical metric for Snap. In the previous quarter, DAUs increased by 9% year-over-year to 432 million, slightly down from a 10% growth rate in the first quarter. Despite this modest slowdown, Snap continues to hold significant appeal among younger demographics, reaching over 75% of individuals aged 13 to 34 in approximately 25 countries. These markets collectively represent more than half of the global advertising market, underscoring Snap's potential reach and influence.

Strategic Investments in AI and Advertising Platforms

In response to competitive pressures and market shifts, Snap is ramping up investments in artificial intelligence to enhance monetization and improve its platform. The company is focusing on expanding its direct response (DR) advertising platform, which is particularly attractive to small and medium-sized businesses (SMBs). This strategy has yielded positive results, with active SMB advertisers increasing by 85% in the second quarter.

By improving its AI capabilities, Snap aims to offer more effective advertising solutions, thereby attracting a larger share of advertising budgets. This move is in line with industry trends, as other major players like Meta, Alphabet, and Pinterest are also investing heavily in AI to boost platform performance and advertiser returns.

Stock Performance and Investor Sentiment

Since the second-quarter earnings report on August 1, Snap's stock has declined by 15%. However, there has been a slight uptick over the past month, indicating cautious optimism among investors. Overall, expectations remain tempered for a company that has seen its stock price plummet by approximately 87% since its peak in September 2021.

Conclusion

Snap Inc. faces a critical juncture as it prepares to report its third-quarter earnings. The company must demonstrate that its strategic investments in AI and focus on enhancing its advertising platform can offset the challenges posed by a softer advertising market and stiff competition from industry leaders. Key indicators to watch include revenue guidance for the fourth quarter, DAU growth, and progress in expanding its SMB advertiser base.

Investors will be closely monitoring the earnings report and management's commentary for signs of renewed growth and a viable path to profitability. The ability of Snap to adapt to market dynamics and leverage its strong presence among younger users will be pivotal in determining its future growth potential and investment value.

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