There was a time when I was staunchly in the bear camp of Snap Inc (NYSE:SNAP). Bungled M&A, negative user growth, indecision on how best to compete with Instagram Stories, all painted a very grim picture for SNAP stock. That picture has changed dramatically, especially this year.
It appears as if Snap has emerged from its really, really bad patch. The momentum from a solid first quarter has continued into the second quarter with SNAP seeing growth in users, engagement, and revenue. It is worth noting upfront that engagement is trending very positively with the average number of Snaps created every day topping 3.5 billion in the quarter.
With the outlook for the next quarter looking easily achievable, investors can kick back and ride the momentum.
SNAP Delivers Strong Q2 Metrics
Daily active users showed high single-digit growth, increasing 8% year-over-year to 203 million. Last quarter, the DAUs sat at 190 million, and growth across all of their broad geographic categories (North America, Europe, and Rest of World) the metric continues to grow.
From a platform standpoint, DAUs were also up sequentially and year-over-year for iOS and Android. Snapchat has refocused on the Android platform and the results of their improvements to their application are promising. At a more granular level, Snapchatters are now sending 7% more Snaps when compared to the old version. This is a good indicator for engagement and retention.
These positive metrics lifted revenue and adjusted EBITDA. Revenue increased 48% year-over-year to $388 million, and adjusted EBITDA improved 53% year-over-year. EBITDA is still negative, but directionally it is what investors want to see. These improvements filtered through the rest of the P&L with better operating and free cash flow.
Overall, financials and KPIs are looking very strong. With a number of new initiatives gaining traction, it’s reasonable to see a continuation through to next quarter.
New Initiatives are Paying Off
The continued investment in SNAP’s Discover platform is showing positive indications of making inroads in a premium content ecosystem.
The daily viewer on Discover has grown over 35 percent year-over-year. Total daily time spent by Snapchatters watching Discover increased by over 60% year-over-year. Total daily time spent by Snapchatters watching Shows more than tripled compared to Q2 2018.
There’s also the next generation AR Lenses that SNAP has been testing. While this isn’t immediately revenue-generating, it fosters the stickiness of the community, and indeed SNAP saw more engagement with Lenses created by our community in Q2 2019 than the entirety of 2018. Over 200 million Snapchatters played with these new Lenses in the first two weeks.
The Bottom Line on SNAP Stock
The important thing to remember is that outlook is the most important. The past quarter is exactly that—the past. Stock valuation is, in theory, forward-looking as it prices in discounted future cash flows.
So, what does the future hold for SNAP?
Guidance wasn’t markedly raised, but the expected range of $410 million to $435 million, represents a healthy sequential quarterly growth of 5.7 percent to 12.1 percent.
Perhaps more significantly, on a year-over-year basis, it represents a 37.6 to 46 percent. So, it may not top the 48 percent figure from the second quarter, but it will be enough to keep investors feeling confident in SNAP stock.
There is certainly room to beat estimates though, and the continued improvements to the advertising platform is an area that is compelling.
SNAP has begun testing its new Instant Create onboarding flow, which streamlines ad generation for businesses in just three steps. There is also the already announced launch of Snap Select, a new way for advertisers to run unskippable commercials within a curated set of programming.
SNAP stock’s 2019 turnaround continues in earnest, and second-quarter earnings results give the market much to be excited about.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
