Shares of Snapchat's parent company, Snap (NYSE: SNAP), soared on Wednesday after the company reported financial results for the third quarter of 2024. User growth and revenue trends are strong and encouraging. And that's why Snap stock was up 14% as of 1:15 p.m. ET.
Good growth and improved cash flow excite investors
Snap ended Q3 with an astounding 443 million daily active users, which was a 9% jump from the same quarter of 2023. On top of this user growth, users spent 25% more time watching content, which led to a greater advertising opportunity. Average revenue per user consequently increased 6%, leading to a 15% jump in revenue.
Snap had a Q3 net loss of $153 million. That's a huge loss, but it's a breath of fresh air compared to its net loss of $368 million in the prior-year period. Moreover, the company did generate positive free cash flow of $72 million compared with negative free cash flow of $61 million last year.
Snap didn't use that free cash flow to repurchase shares in Q3. But shareholders seem happy that the company just authorized a new $500 million buyback plan and it contributed to the stock being up today.
One thing to watch with Snap
Snap generates revenue primarily via advertising. And advertising rates are measured with a metric called effective cost per mille (eCPM). In Q3, Snap's eCPM dropped by 7% year over year, which is bad. And management said it was because inventory grew at a faster rate than demand.
Here's what that means: Snap is offering more advertising slots (inventory) than what advertisers want. In theory, demand from advertisers should be quite high given the user demographics and the company's investments in its advertising capabilities. But as of right now, this hasn't paid off with the demand it hoped for.
If demand eventually outpaces inventory, Snap's monetization rates will improve and the business would suddenly be growing revenue at an accelerated rate. That would be an exciting development, so investors will watch and wait to see if this eventually comes to fruition.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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