Snap (SNAP) Struggles to Maintain Momentum Despite Positive Q4 Results

Jay's InsightThursday, Feb 6, 2025 9:34 pm ET
3min read

Snap Inc. entered its latest earnings report with a mix of high expectations and ongoing concerns about the company's ability to drive sustainable growth. While the social media platform delivered an upside surprise on both revenue and earnings, its stock initially soared in after-hours trading before quickly reversing course. By the time the market opened, Snap shares were trading lower, with selling pressure intensifying throughout the session.

The volatility surrounding Snap is nothing new. The stock is prone to large swings, often reacting sharply to earnings reports and analyst sentiment. While the company showed promising improvements, including its first quarter of GAAP profitability in three years, concerns over slowing revenue growth and a weaker-than-expected outlook for daily active users (DAUs) have led to renewed investor skepticism.

Solid Q4 Performance with Key Milestones

Snap reported GAAP earnings per share of 0.01 dollars, exceeding expectations and marking a milestone for the company as it returned to profitability for the first time since 2021. Revenue rose 14.4 percent year-over-year to 1.56 billion dollars, reflecting the company's ongoing success in expanding its advertising business and premium subscription service.

A major driver of Snap’s revenue growth was the continued expansion of its Direct Response (DR) advertising segment. For the full year, DR advertising revenue increased by 16 percent, underscoring its growing importance within the company’s broader ad ecosystem.

Additionally, Snapchat+, the company’s premium subscription offering, more than doubled its subscriber base to 14 million users. This rapid growth led to a 131 percent jump in revenue for Snapchat+, which now accounts for roughly 10 percent of total company revenue.

Despite these positive takeaways, Snap’s performance is still being viewed with caution. The company’s revenue growth has been slowing sequentially, dropping from a 20.9 percent increase in the first quarter of 2024 to 15.8 percent in Q2, 15.4 percent in Q3, and 14.4 percent in Q4. While the decline is not dramatic, it suggests that Snap’s ability to accelerate growth remains uncertain.

Slowing User Growth Raises Concerns

Another area of disappointment came from Snap’s guidance on user growth. The company ended the fourth quarter with 453 million DAUs, representing a 9.4 percent increase from the previous year. However, its first-quarter 2025 outlook calls for 459 million DAUs, reflecting just an 8.8 percent year-over-year gain.

While this decline in user growth may seem minor, it adds to concerns that Snap’s engagement levels are not keeping pace with competitors in the highly competitive social media landscape. Meta’s platforms, including Instagram and Facebook, continue to dominate digital advertising, while TikTok remains a major player in short-form video content.

Snap has struggled in recent years to keep users engaged, particularly on its Stories page, which was once a key driver of the platform’s popularity. Management acknowledged that engagement losses have been an issue and indicated that new initiatives will be rolled out in the coming months to address these challenges.

2025 Strategic Focus on Advertising and Monetization

Looking ahead, Snap is focusing on several key areas to sustain its revenue momentum. The company is doubling down on advertising, introducing new ad placements to expand its reach and rolling out automated campaign tools to improve targeting and engagement.

Another priority is enhancing the overall user experience through machine learning improvements, which could lead to better ad relevance and higher returns for advertisers. If these efforts prove successful, Snap may be able to drive stronger ad revenue growth despite the slowing pace of user expansion.

On the subscription side, Snap’s leadership suggested that there may be opportunities to introduce price increases for Snapchat+, further boosting average revenue per user (ARPU). While it remains to be seen how receptive users will be to higher pricing, the strong subscriber growth in 2024 indicates that Snap has built a solid foundation for its premium service.

Market Reaction and Outlook

Despite the positives in Snap’s earnings report, the stock’s sharp decline reflects the market’s cautious stance. The company also received a downgrade from Wells Fargo, adding to selling pressure. Investors appear hesitant to fully embrace Snap’s turnaround until it demonstrates a clearer path to sustained growth.

Snap’s stock has remained range-bound, struggling to break above key resistance levels. While the company has made notable improvements, including its return to profitability and successful expansion of Snapchat+, its ability to sustain meaningful revenue acceleration remains uncertain. Until the company provides a more compelling growth narrative, the stock may continue to trade within its current range.

For investors, Snap represents a high-risk, high-reward opportunity. If its advertising initiatives and engagement strategies gain traction, the stock could see renewed momentum. However, if revenue growth continues to slow and user engagement remains a challenge, Snap may struggle to attract long-term investor confidence.

The coming quarters will be crucial in determining whether Snap can build on its recent successes or if the company will continue to face headwinds in a competitive digital landscape. Investors will be closely watching for improvements in user growth trends, ad revenue performance, and the success of new engagement strategies.