Snap has beaten Wall Street’s quarterly expectations due to its huge growth in the advertising platform. This profit explosion, particularly in its digital advertisement sector, made Snap’s shares climb by 6% in Tuesday’s after-hours trading. The company’s outstanding performance is against the backdrop of a volatile market and the uncertainty of TikTok’s potential ban in the United States. As a result, Snap’s strategic position in the digital ad market is beginning to emerge, with analysts noting that the evolving situation could work in Snap’s favor as advertisers seek alternative destinations for digital ads.
CEO Evan Spiegel addressed the effects of the shifts in the post-earnings call, noting that businesses are diversifying their ad budgets and putting more focus on contingency planning with the evolving digital landscape. He added that as the future of TikTok hangs in the balance, advertisers are reassessing their strategies to ensure continued success, and this may lead to higher spending on the likes of Snapchat. The move is especially significant as Snap continues to simplify its ad sales approach amid the shifting competitive landscape and expectations of advertisers interested in reaching younger users.
One of the key drivers of Snap’s profitability in the quarter was its subscription service, Snapchat+. The service has been expanding aggressively, doubling subscribers to 14 million in the fourth quarter. Snapchat+ has offered a new source of revenue for Snap, augmenting the company’s primary advertising business. Spiegel indicated on the earnings call that a price increase for Snapchat+ is likely on the way, which would further boost the company’s average revenue per user (ARPU). Having seen the success of Snapchat+, a price increase would allow Snap to capture even more margins, which would add to the overall revenue picture.
Most of Snap’s strong profit is the result of the company’s aggressive investments in artificial intelligence (AI) and machine learning, particularly in ad personalization. Over the past year, Snap has placed AI at the center of its ad strategy, highlighting the application of advanced technology to make ads more effective and relevant. A primary method of revenue generation has been direct response ads—ads focused on getting specific user actions, such as app downloads or website visits—rather than traditional brand awareness campaigns. This shift to direct-response ads has allowed Snap to better serve small- and medium-sized businesses, which are now the largest contributors to Snap’s ad revenue growth in 2024.
Small and medium-sized businesses have particularly been successful with Snap’s advertising platform because it allows them to target younger, more technologically inclined consumers who are active on platforms such as Snapchat. The direct-response model has been a win-win situation for these businesses, offering a more quantifiable and tangible return on advertising investment compared to older forms of advertising. Additionally, Snap’s investments in AI have allowed it to persist in optimizing ad placements, which increases the probability of meaningful interaction with users.
Looking ahead, Snap is incorporating additional features into its advertising products that could further enhance its platform’s utility for advertisers. Some of these include Sponsored Snaps, a type of ad in users’ inboxes that is a video, and Promoted Places, which draws attention to business locations on Snap Map. These innovations are seen as ways to further increase user engagement while offering advertisers more creative ways of reaching their target audience. Sponsored Snaps, in particular, are designed to capture user attention in a more active and personalized way, which can also increase the chances of users interacting with the ads.
Analysts, including eMarketer principal analyst Jasmine Enberg, have praised Snap for continued investment in ad tech along with in its subscription services. Enberg noted that investment has been precious in helping Snap attain more consistent revenue growth. The company’s ability to scale its ad products and to grow its portfolio of subscription services positions it well for long-term success despite the competitive ad market.
Snap’s fourth-quarter financials saw an adjusted EPS of 16 cents, beating the average analyst estimate of 14 cents, according to LSEG data. It also posted a 9% year-on-year growth in DAUs on Snapchat, at 453 million, higher than expectations of 450.8 million. These figures point to healthy engagement on the platform, with users still engaging with Snapchat content and advertisements in a significant manner.
Snap’s revenue for the quarter was up 14% year-over-year at $1.56 billion, slightly above expectations of $1.55 billion. This was driven by its ad business, as well as the expansion of its subscription service. The company’s first-quarter guidance, however, points to some choppy waters ahead. Snap sees first-quarter revenue of $1.33 billion to $1.36 billion, with the midpoint slightly above market expectations. That said, its forecast for adjusted EBITDA before interest, taxes, depreciation, and amortization fell short of expectations, at between $40 million and $75 million, compared with the $78.1 million that had been expected. The EBITDA miss may be a harbinger of future challenge in managing costs or of additional investments needed to fuel growth.
Despite this, Snap’s longer-term prospects are positive. Snap continues to solidify its position in the digital ad space through strategic investments in AI-driven ad personalization, growing its user base, and building wider ad products. Snap’s focus on small- and medium-sized businesses, along with its foray into new forms of advertising, demonstrates the company’s commitment to driving further revenue growth and maintaining its competitive edge in the evolving market.
