(Bloomberg) -- Snapchat owner Snap Inc. reported a stronger-than-expected gain in fourth-quarter revenue and gave an upbeat forecast for the current period, a sign that an overhaul of its advertising business is paying off. The shares soared on the news.
Sales rose 14% to $1.56 billion in the period that ended Dec. 31, Snap said Tuesday in a statement. The social media company expects first-quarter sales of as much as $1.36 billion in the current quarter, compared with the average analyst estimate of $1.33 billion.
Snap said new advertising formats have attracted more small- and medium-sized marketers to its photo-messaging app. Chief Executive Officer Evan Spiegel spent the past several years undertaking a costly revamp of Snapchat’s ads operation, moving away from more broadly-targeted brand advertising toward more targeted ads with a direct prompt or call-to-action, like purchasing a product or downloading an app. These direct-response ads, as they are known, are more expensive to purchase and require better targeting technology from companies like Snap.
Although Snap finally began reaping the rewards of that overhaul last year, the company’s quarterly results have been inconsistent, at times falling short of Wall Street’s revenue estimates, and the stock has declined more than 30% in the past year. The shares jumped more than 5% in extended trading Tuesday after closing at $11.60 in New York.
User Growth
The Santa Monica, California-based company also beat analysts’ expectations for user growth on its Snapchat app after focusing more on video content, reaching 453 million daily active users in the fourth quarter. Profit, excluding certain items, rose to 16 cents a share in the period, topping the average projection of 14 cents.
Snap has released several new ad choices in the past five months, including Sponsored Snaps and Promoted Places — ads that show up in the app’s chat inbox and map feature, respectively. The company, which has traditionally attracted larger advertisers, has begun focusing on smaller marketers as well, a segment that was the largest contributor to its ad revenue growth last year, the company told investors Tuesday.
Snap has also elevated an executive to oversee its growing ads business: Ajit Mohan, a Meta Platforms Inc. alumnus who was Snap’s president of the Asia-Pacific region for the past two years, is taking on the role of chief business officer.
Snapchat has been recommending more video content to users as it seeks to compete with rivals like ByteDance Ltd.’s TikTok and Meta’s Instagram. The company recently updated its algorithm for ranking video content to help boost engagement. Last quarter, Snapchat users spent 25% more time watching videos than the year prior, which in turn has lured advertisers to buy more ads on the site.
That trend could continue if TikTok is ultimately shut down in the US, since Snap is likely to benefit from a possible ban. The threat of China-based TikTok going dark has already pushed some creators to re-evaluate where to invest time and build audiences. Advertisers are also seeking out stable TikTok alternatives and ways to diversify their marketing strategies.
“The overall environment of uncertainty is benefiting our business. I mean, certainly, advertisers are very focused on contingency planning and diversifying their spend,” Spiegel said on a conference call following earnings. “I think the same goes for creators who are really thinking hard about how they can build the most diversified engagement with their fan base across various platforms, including Snapchat.”
Snap has also launched new products and services, including smart glasses, as a way to ease its reliance on advertising revenue. Snapchat’s subscription product, which includes access to an AI-powered chatbot that can recommend restaurants or identify objects from a picture, now has 14 million subscribers and is on track for more than $500 million in annual revenue, based on fourth-quarter sales.
Last year, Snap unveiled a new version of its Spectacles smart glasses, which overlay digital filters onto the physical world and could eventually serve as a new source of revenue for the company. Mohan, Snap’s newly appointed chief business officer, will also be in charge of the company’s other revenue products and operations.
AI Investment
Snap has invested heavily in AI and machine learning technologies to power those new products and services, to more effectively place ads and to better recommend video content. The company said it plans to spend about 85 cents per daily user each quarter on infrastructure services related to those technologies, slightly above the $1.5 billion it spent in 2024.
The social media company relies on cloud computing services to power its AI work instead of building its own data centers, which are expensive. Snap has a long-standing partnership with Alphabet Inc.’s Google for that reason, and uses Google’s Gemini AI model in the Snapchat app. Snap is also exploring using open-source AI models, such as those from Chinese startup DeepSeek, which is said to rival top American AI companies but was developed at a fraction of the cost.
“It just further validates our view that a lot of these models are going to continue to become commoditized over time and, obviously, are going to become more and more efficient to run,” Spiegel said of DeepSeek. “So hopefully that will have some impact for us over the longer term.”
(Updates with quotes from Spiegel’s investor call starting in 10th paragraph.)
