Snap Inc. (NYSE:SNAP) reported a second-quarter revenue increase of 19% to $1.599 billion, with direct revenue—excluding advertising—jumping 85% to $316 million. This segment accounted for roughly 57% of the company's growth, according to initial estimates based on rounded figures. However, shares retreated midweek, closing Friday at $5.33, down 7.9% from Tuesday's high of $5.79, as investors remain cautious about the durability of this new growth driver.
Direct Revenue Emerges as Key Growth Engine
Direct revenue, which includes subscriptions and other non-advertising sources, represented only 19.8% of total sales in the quarter. The significant contribution to growth signals a strategic shift for Snap, which has traditionally relied on advertising. “This development provides Snap with an additional growth driver aside from advertising,” noted a market analyst. Yet, the market's reaction suggests skepticism about whether this momentum can be sustained.
Advertising Strengthens, But User Metrics Mixed
Advertising revenue also improved, rising 9% to $1.28 billion, fueled by increased spending from World Cup-related campaigns and larger clients in North America. Overall revenue surpassed the LSEG consensus of $1.54 billion by approximately $59 million. However, user growth remained uneven. Markets outside North America and Europe added about 32 million daily active users (DAU), while North America and Europe combined lost 8 million DAUs. Total DAU reached 493 million, a 5% increase year-over-year.
Financial Performance and Outlook
Net loss narrowed to $164 million from $263 million a year earlier, while free cash flow surged to $121 million from $24 million. Chief Executive Evan Spiegel said the quarter served to “strengthen our core business and build a more durable financial foundation.” For the full year, Snap raised its infrastructure cost outlook to $1.65-1.70 billion, up $50 million on both ends, citing increased spending on AI and machine-learning. Third-quarter revenue guidance is set between $1.70 billion and $1.74 billion, with adjusted EBITDA projected at $300-350 million.
Market Reaction and Analyst Sentiment
Shares closed Friday at $5.33, up 2.1% for the day but still 7.9% below Tuesday's close. The stock gained 13.6% over the week, outperforming other social media peers like Meta Platforms (NASDAQ:META) and Pinterest (NYSE:PINS), which rose 0.3% and 1.5%, respectively. Despite the positive earnings, Wall Street remains cautious. FactSet data shows 12 Buy ratings, 33 Holds, and three Sells, with a consensus price target of $7.44, implying a 39.6% upside. The median target of $6.88 suggests a 29.1% gain.
Risks and Forward-Looking Factors
Key risks include declining North American user numbers, rising AI-related expenses, and ongoing legal uncertainties regarding young users. Snap also flagged that regulatory attention could require product changes or drive costs higher. The upcoming launch of Specs on September 16 introduces additional execution risk. Investors will also watch upcoming economic data, including July consumer inflation, producer prices, and retail sales, which could impact growth stocks if inflation runs hot.
Snap's second-quarter results demonstrate a viable secondary revenue stream, but the stock's muted reaction indicates that shareholders are waiting for more evidence of sustainability. As CEO Evan Spiegel emphasized, the company is building a more durable financial foundation, but the market wants to see it hold.
