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Snap - revenue and profits rise

Snap announced fourth quarter results on the 3 February.

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Snap announced fourth quarter results on the 3 February. Revenue rose 42% to $1.3bn driven by growth across all geographies. Other Income, which includes things like currency gains and investing activities, more than doubled, helping net profit rise to $22.5m, up from a $113.1m loss last year.

First quarter revenue is expected to be between $1.0bn and $1.1bn while underlying cash profits are seen breaking even.

The shares rose 59.2% in after-hours trading.

View the latest Snap share price and how to deal

Our view

Net profits swung from red to black this quarter, as operating losses narrowed considerably, marking the first time Snapchat's managed to report a quarterly profit since it debuted. This is a testament to management's efforts to continue growing market share and improving marketing tools- which has driven both user numbers and the average revenue earned on each one higher.

Ongoing investment in the platform has been driving this growth. Proprietary video content and augmented reality filters are improving the experience for users. A large, engaged audience spending an increasing amount of time on the app is attractive to advertisers, whose dollars ultimately drive Snap revenue.

Crucially Snap's also investing in the backend tools that allow marketing teams to target and assess the effectiveness of their advertising dollars. This is an expensive endeavour, but once these costs are covered each new user will drop almost straight through to profits--it's a model that's worked well for competitors like Facebook, and one that Snap's on its way to replicating.

The new iPhone operating system, iOS 15, makes it more difficult for advertisers to track ad performance. Making it more difficult to measure advertiser return on investment has inevitably put off some spending. Together with thinning advertising budgets, this could make for a difficult environment ahead.

Those headwinds appear to be subdued so far. Compared to competitors like Facebook, Snap management didn't seem overly concerned.

With profits finally in the black, maintaining user growth is a key piece of the puzzle. Teenagers are a fickle audience - with an ever- present risk they vanish off to the next big thing. Even in the current market, advertisers are spoiled for choice when it comes to social media platforms, and the likes of Facebook and TikTok are formidable opponents.

Costs are also a potential obstacle. The group's free cash flow has turned positive, but that doesn't account for eye wateringly high share awards to employees. Stock options may be costless in cash terms, but they have a real effect on other shareholders by spreading any future returns more thinly. Add to that the fact ordinary shareholders have no voting rights and CEO Evan Spiegel controls a majority of voting shares, and governance could potentially be a real concern.

The latest results suggest that Snap is executing on its strategy. But competition, cost and governance concerns, together with a price to earnings ratio well above rival social media groups mean we remain wary of Snap.

Snap key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Fourth Quarter Results

Snap had 319m Daily Active Users (DAUs) in the fourth quarter, a 20% year-on-year increase. That was driven by 41% growth in Rest of World to 140m DAUs as well as an uptick in North America and Europe.

Average revenue per user (ARPU) rose 18% to $4.06, with 33% growth in both North America and Europe held back by a 1% uptick in Rest of World.

Free cash flow was $161.0m, up from an outflow of $69.0m last year. The group spent $134.3m on acquisition costs during the quarter, $7.7m on strategic investments and share-based compensation was $297.6m.

The group had a net cash position of $1.4bn at the end of the quarter, up from $862.4m last year.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 4th February 2022