The Stock of Snap Rises Following Surprise Revenue Growth

Snap Inc. shares are known for their significant post-earnings fluctuations, but the market reaction appears to be notably subdued following Tuesday's earnings report. This isn't because the latest numbers lacked developments; instead, Wall Street seems to be carefully evaluating an anticipated improvement in business trends in the most recent quarter, while also considering some concerning signals that emerged afterward.

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Snap reported a 5% increase in revenue for its latest quarter, breaking a streak of revenue declines. The company highlighted the positive adoption of new brand-advertising products. However, Snap struck a more cautious tone for the current quarter, partly due to the Middle East conflict.

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The company observed advertising spending pauses from numerous brand-focused campaigns immediately after the conflict began, which negatively affected its revenue. While some of these campaigns have resumed, the impact on revenue has only partially diminished, and Snap continues to witness new spending pauses. There is also a risk that these pauses could persist or increase in magnitude.

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Due to these uncertainties related to the Middle East conflict, Snap declined to provide formal guidance for the fourth quarter. However, it did mention that its internal forecasts anticipate revenue in the range of $1.320 billion to $1.375 billion, slightly below the FactSet consensus of $1.34 billion.

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For the latest quarter, Snap reported $1.19 billion in revenue, surpassing analysts' expectations of $1.11 billion. This marked a return to revenue growth after two consecutive quarters of year-over-year declines. The company posted a net loss of $368 million, or 23 cents per share, slightly better than analysts' projections of a 24-cent per-share loss.

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Snap's daily active user count increased to 406 million for the third quarter, up from 397 million in the second quarter, aligning with the FactSet consensus. Additionally, Snap's board of directors approved a stock-buyback program of up to $500 million. The goal of this program is to offset dilution resulting from the issuance of restricted stock units to employees as part of the compensation program.

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Looking ahead, Snap sees its direct-response advertising platform making progress, but it acknowledges limited visibility into advertising demand due to several factors. These include the ongoing Middle East conflict, historical trends of backweighted revenue in the holiday quarter, and the fourth quarter's higher proportion of brand advertising, which grew more slowly than direct-response advertising during the third quarter.

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