Snap surges 10% as it gets a major boost from AI and paid subscribers

• Snap's stock rose 10% after its third-quarter revenue beat Wall Street expectations.
• Snap's revenue grew 15% to $1.37 billion, surpassing analyst estimates of $1.36 billion.
• Snap's revenue growth was attributed to AI features and growth in Snapchat+ users.

Snap rose 10% in late trading after reporting third-quarter revenue that beat analyst expectations, following the rollout of a wide range of artificial intelligence features and growth in paid users.

Snap, which is most popular for its photo-messaging service, saw quarterly revenue grow 15% year-on-year to $1.37 billion. The figure slightly beat analyst estimates of $1.36 billion.

Snap's CEO Evan Spiegel said efforts to drive engagement, such as AI-generated collage features and using machine learning for better personalization, are showing early signs of payoffs.

Spiegel said Snap has also introduced AI tools for creators, which it has been pushing to onboard onto the platform recently.

"In Q3, we began testing a new AI video generation tool that enables creators to generate engaging videos with a simple text or image prompt," Spiegel said on Tuesday's earnings call. "Our efforts to support creators have contributed to the number of creators posting content growing approximately 50% year-over-year in Q3."

The social media platform grew its daily active users by 11 million people in the third quarter, marking a 9% increase year-on-year. However, Snap projected that the current quarter will only see the number of users grow by 8 million to 451 million.

Daily active users is a measure of how much people want to engage with a platform. It's an important metric for social media companies because more users typically translates to more advertising money.

Paid subscribers and AI are boosting Snap

The CEO also attributed the revenue growth to paid subscriptions.

Snapchat+, a $3.99-a-month feature launched in 2022 amid a slump in ad revenue, reached 12 million subscribers in the third quarter. Subscribers more than doubled year over year and contributed to around $123 million of quarterly revenue.

The social media platform has also overhauled its advertising business in recent years. It shifted from brand awareness ads to more expensive direct response ads that have a call to action, encouraging users to buy a product or visit a website.

Despite factors that have been positively impacting Snap, the company has consistently been reporting losses, including a $153 million loss in quarter three. It reported a $368 million loss in the third quarter of 2023.

Snap's 443 million user base is small compared to Meta's 3.3 billion users, and TikTok's more than 1 billion users, both of which it directly competes with for ad revenue.

The performance gap between Snap and Meta and Google continues to widen, further accelerating Snap's market share losses and revenue growth underperformance, Jefferies analysts led by James Heaney wrote in an earnings preview note last week.

The company has missed analyst expectations twice in the last four quarters. Its stock is down over 35% year-to-date.

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