Snap Inc. experienced a sharp decline in its stock price on Thursday, with shares dropping more than 10% in premarket trading. The sell-off followed the company's third-quarter earnings report, which revealed revenue and user growth figures that fell short of analyst expectations, casting doubt on the pace of its advertising recovery.
For the quarter ended September 30, Snap generated revenue of $1.72 billion, a 14% increase year-over-year but slightly below the $1.73 billion consensus estimate from FactSet. The company reported adjusted earnings of 3 cents per share, surpassing expectations for flat earnings. Net income reached $56 million, a significant improvement from a net loss of $104 million in the same period last year.
Operational metrics showed strength, with operating cash flow climbing 44% to $210 million and free cash flow rising 76% to $164 million. Despite these profitability gains, investors remained focused on the slower-than-expected advertising growth and user engagement trends.
Advertising Growth Remains Below Expectations
Snap's advertising revenue increased just 4% year-over-year, missing the 6% growth analysts had projected, according to Bloomberg. The company relies heavily on advertising and has been integrating artificial intelligence tools to enhance campaign performance and attract more advertiser spending.
CEO Evan Spiegel noted that advertisers were beginning to see benefits from improvements to the company's performance advertising products. However, he acknowledged that advertising revenue growth still lagged management's ambitions. The company is now prioritizing the translation of these improvements into broader advertiser adoption and more durable revenue growth.
Chief Commercial Officer Ronan Harris highlighted that direct-response advertising continued to grow strongly, supported by improved purchase outcomes, while upper-funnel brand advertising declined year-over-year.
Snap reported 495 million daily active users for the quarter, up from 493 million in the previous quarter and 477 million a year earlier, but below the approximately 499 million analysts had expected.
For the fourth quarter, management guided revenue between $1.95 billion and $1.985 billion, roughly in line with Wall Street forecasts, and adjusted EBITDA of $490 million to $525 million.
Snap Bets on AI-Powered Specs Smart Glasses
Snap is looking to its upcoming Specs smart glasses to strengthen its position in the consumer artificial intelligence market. The augmented reality glasses are available for preorder at a starting price of $2,195, with shipments expected to begin later this year. The product will include Specs Intelligence, an AI-powered assistant designed to connect with users' email, calendars, and other personal information to help manage daily activities.
Spiegel said the company had received positive feedback from people experiencing Specs firsthand. However, the product faces stiff competition from Meta Platforms' smart glasses, which currently lead the market. While Meta's glasses lack a display and offer fewer functions, their lighter and more conventional design could appeal to a broader consumer base. The high price point and growing consumer and regulatory scrutiny of smart glasses could also affect adoption.
Snap also disclosed that its paid subscriptions across Snapchat+, Memories Storage, and Lens+ had surpassed 30 million.
Regulatory Risks and Analyst Outlook Weigh on Shares
Snap faces regulatory challenges related to youth safety and potential restrictions on social media use by teenagers. The company warned that evolving regulations in the US and internationally could require product changes, increase compliance costs, and affect user growth and engagement.
In a separate development, Cantor Fitzgerald maintained a Neutral rating on Snap shares while lowering its price target to $5 from $6. Snap's shares have fallen 27% this year, reflecting investor concerns about advertising growth and the company's ability to compete in the evolving AI market.
This article is for informational purposes only and does not constitute financial advice.
