Snap (SNAP) Q1 Earnings Call Highlights: Bets on user growth to overcome ad slump

Snap Inc. (NYSE: SNAP) witnessed a spike in user growth in the early months of 2020, with people across the world taking to social media platforms to keep in touch with friends and relatives during the coronavirus-related lockdown. The stock made strong gains during Tuesday’s extended trading session, after the photo-sharing platform reported stronger-than-expected revenues for the first quarter.

Check Snap’s Q1 2020 Infographic

The positive results came as an encouragement for investors and others like Facebook (FB) and Twitter (TWTR) witnessed an uptick in market value. There has been concerns that the COVID-19 crisis would have a negative impact on social media firms that depend on advertising revenue. The full impact of the ongoing crisis should reflect in the fiscal performance of companies in the second quarter. The growing uncertainty has prompted Snap’s management, like most others, to withhold the full-year financial guidance.

Near-term Outlook

While initial estimates indicate that revenues grew 15% year-over-year until April 20, the performance in the remainder of the quarter is unpredictable due to the disruptions. Going by the current trend, the number of daily active users is expected to rise to 239 million by the end of the quarter.

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Snap’s stock has probably hit the recovery path, thanks to the upbeat sentiment that followed the earnings, and the uptrend will likely continue in the current quarter and beyond, as normalcy returns to the market. The majority of analysts following the company are of the view that the stock is a good buy at the current valuation.  

“The global outbreak of COVID-19 has dramatically shifted the ways brands are thinking about reaching new audiences. While friends and families are physically separated from each other and their regular routines, Snapchatters are coming together virtually to maintain their friendships through visual communication, self-expression and storytelling.”

Evan Spiegel, CEO of Snap

Expanding User Base

At 229 million, the number of daily active users was up 20% compared to the first quarter of 2020. Consequently, revenues climbed 44% to $462 million and loss narrowed to $0.08 per share. The top-line also came in above the market’s prediction.

Play real-time multiplayer games with friends on Snap Games 🚀
Team up or go head-to-head while catching up over Voice or Chat 💬

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— Snapchat (@Snapchat) April 7, 2020

There was a 35% growth in time spent on the Discover platform, while the time spent on Shows more than doubled, mainly due to increased consumption in the final weeks of the quarter when travel restrictions came into effect.

Turnaround Goal

Snap, which went public more than three years ago, is yet to achieve consistent profitability. It is estimated that across-the-board business slump would have a negative impact on advertising revenue in the near term. Also margins might come under pressure from high operating costs and spending on content acquisition.

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Meanwhile, the company is taking steps to innovate the platform and boost user experience, while making it attractive for advertisers. The latest move in that direction was the launch of new games and App Stories, which brings content to apps created by third-party developers. The lenses and filters features have been a great hit among users. Efforts are on to enhance advertiser experience through innovations like augmented reality.

Growth Strategy

While the first quarter was relatively muted in terms of launches, Snap continues to invest in diversification and expansion of its content offerings. Going forward, it looks to leverage the improvement in audience engagement, product innovation, auction dynamics and advertiser ROI to drive growth.

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Snap’s shares gained about 20% since closing the last trading session lower. They had maintained a steady uptrend throughout last year and entered 2020 on a positive note. But the momentum waned since then and the stock dropped 26% so far this year. All social media firms have been hit by the recent market selloff that triggered a major stock market crash.