Shares of Snap Inc. (NYSE: SNAP) have gained over 23% in early market trading on July 23 on the back of its stellar second-quarter results. In Q2, Snap reported revenue of $982 million, an increase of 116% year over year and significantly higher than Wall Street estimates of $846 million. Analysts also forecast the company to report a loss per share of $0.01. But Snap’s earnings stood at an impressive $0.10 per share in the June quarter.
Snap’s daily active users surged to 293 million while analysts forecast this figure at 290.3 million. Its average revenue per user stood at $3.35 compared to Wall Street estimates of $2.92. The company’s net loss narrowed by 53% to $152 million compared to a loss of $326 million in Q2 of 2020.
While Snap’s robust revenue growth can be attributed to higher ad spending the company’s chief business officer, Jeremi Gorman explained the growth reflects “the momentum in our advertising business and the hard work of our team serving our partners and helping them to generate return on their investment.” He added, “We benefited from a favorable operating environment and continued success with both direct response and large brand advertisers, and we continue to leverage our performant ad products to grow our advertiser base globally.”
Snap expects revenue growth of between 58% and 60% in Q3
Snap Inc. has forecast revenue to grow between 58% and 60% year over year in the third quarter. This was significantly lower than Wall Street’s Q3 revenue growth forecast of 84% year over year. In the third quarter of 2020, Snap reported sales of $550 million.
Snap is now moving towards consistent profitability. It generated an adjusted EBITDA of $117 million in Q2 compared to a loss of $96 million in the prior-year period. It was Snap’s third profitable quarter of adjusted EBITDA in the last 12-months.
Snap Inc is forecast to improve its bottom-line from an adjusted loss per share of $0.06 in 2020 to earnings of $0.67 per share in 2022. Analysts also expect Snap sales to rise by 60% in 2021 and by 48% in 2022. Given its revenue is forecast to touch $5.76 billion in 2022, SNAP stock is trading a forward price to sales multiple of 21x which is steep.
However, growth stocks like Snap Inc command a high valuation. Its sales grew by 43%, 45% and 46% in 2018, 2019 and 2020% respectively. In Q1 of 2021 sales were up 66% year over year and this growth rate has accelerated in the June quarter as well.
What next for SNAP stock investors?
Snap has successfully created and monetized a user base that is highly engaged. As the purchasing power of Snapchat users increases, revenue will continue to move higher over the upcoming decade. Businesses are also looking at Snap as a platform where they can spend millions of advertising dollars.
As seen earlier, Snap is racing towards profitability and it reported a positive free cash flow for the first time ever in Q1. Its operating cash flow also rose to $137 million in Q1, up from just $6 million in the year-ago quarter. In Q2 however Snap reported a free cash flow of negative $116 million due to an increase in net working capital.
A positive cash flow metric will provide Snap will enough financial flexibility. The company is eying the lucrative augmented reality space which might touch $300 billion by 2025.
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