Snap's subscription growth trajectory has shown remarkable strength; however, the social media platform's vulnerability to the broader macroeconomic landscape remains a significant concern, as highlighted by RBC Capital Markets on Friday. On Thursday evening, Snap Inc., the parent company of the widely-used social media app Snapchat, disclosed its adjusted earnings for the second quarter, reporting $0.02 per share.
This represents a reversal from the $0.02 loss incurred in the same quarter the previous year and aligns closely with the Capital IQ-complied consensus expectations. The revenue experienced a notable increase of 16%, reaching $1.24 billion; however, it fell short of Wall Street's projections, which had estimated revenue at $1.25 billion.
Furthermore, there was a 9% increase in daily active users, climbing to 432 million, while the Snapchat+ service expanded its subscriber base to 11 million. In terms of revenue, Snap reported that other revenue streams surged by 151% year over year, hitting $105 million. Chief Financial Officer Derek Andersen remarked during the earnings conference call that this segment primarily includes Snapchat+ subscription revenue alongside all non-advertising revenue streams.
Analysts at RBC, Brad Erickson and Logan Reich, noted in a client update that "the company's direct response business continues to flourish, with significant growth observed in the small- and medium-sized business sector and a notable rise in conversions API adoption. The robust growth of subscription adoption is contributing substantially to high-margin revenue for Snap." Conversely, brand-oriented advertising revenue dipped by 1% compared to the prior year, attributed to particularly weak demand from several consumer discretionary sectors and the timing effect of holidays shifting out of the second quarter, according to Andersen's comments to analysts.
On Friday, during afternoon trading, Snap’s shares plummeted by 25%, marking a staggering 43% decline year-to-date. This sharp drop reflects RBC's sentiment that brand advertising expenditure has waned due to macroeconomic uncertainties and the potential retreat of a few larger advertisers. RBC analysts stated, "Brand spending fell short of expectations following a one-quarter rebound; as a result, the margin flow-through that bullish investors anticipated for the third quarter did not materialize." Across all geographies, Snap's second-quarter revenue fell below forecasts, except for Europe, which surpassed estimates by 7.1%, according to RBC's analysis.
When comparing Snap's advertising business to its peers, including Facebook's parent company Meta Platforms, Pinterest, and Alphabet's Google and YouTube, analysts observed that Snap's ads business, excluding Snapchat+, underperformed. Looking ahead to the ongoing quarter, Snap has projected revenue to range between $1.34 billion and $1.38 billion, with Street expectations set at $1.36 billion.
RBC maintained a sector perform rating on Snap's stock, setting a price target at $16. The analysts expressed optimism about Snap's advancements with platform improvements, which are reflected in the solid growth of its direct response business. However, they conveyed caution, stating that the company's sensitivity to macroeconomic conditions remains too unpredictable to adopt a more favorable position on its stock performance..