Snap has been on a clear revenue diversification path over the past few years. Branching out from its core business in ad revenue, it has launched subscription products such as Snapchat+. And with a subscription revenue run rate of $1 billion, that plan appears to be working and gaining Wall Street favor.
Before getting into those results, what’s driving all this? Snap’s revenue diversification is motivated by a few things. On a basic level, it’s a textbook revenue-growth maintenance as a core product matures – in Snap’s case, ad monetization. On another level, environmental headwinds challenge that core product.
It’s no secret that the advertising world is in upheaval. That’s driven by several factors, including more supply and less demand. The “more supply” part involves a growing array of options where marketers can place their chips. And the “less demand” part involves shrinking ad budgets for various reasons.
Drilling down on that last part, lower ad budgets are driven by economic conditions, as we examined this week, as well as technical disruption. Digital marketers are getting AI savvy around sophisticated ad creation (which hurts agencies) and greater reliance on earned media (which hurts media players).
That brings us back to Snap. As noted, it has diversified itself with a $1 billion run-rate subscription business. That comes from 25 million paid subscribers, which cracks the code on getting social media users to pay for things. And because it’s subscriptions, this is recurring revenue, which investors like.
Snap’s Subscription Business Tops $1B, Driving Revenue Diversification
Bright Spots
Sticking with that last point, recurring revenue emboldens Snap’s position and fuels its diversification narrative. And that has inspired some love from Wall Street. After a tough few years of market-cap declines, public markets are seeing bright spots for Snap’s near-term financial performance.
Specifically, Snap shares began to climb earlier this week after Rothschild Redburn upgraded the Stock rating from neutral to buy. It also doubled its price target from $5 to $10. Why the bullish view? Analyst Joseph Barker cited much of the narrative above around diversification, as well as other performance.
That performance includes Q4’s 10 percent year-over-year revenue growth to $1.72 billion and gross margin of 59 percent. Net income was $45 million, and adjusted EBITDA was $358 million – all year-over-year improvements. Snap is also on the verge of reaching a billion monthly active users.
All the above is part of an effort to tell a cleaner income story to Wall Street. In addition to top-line growth and diversified revenue, Snap is boosting profitability through restructuring, such as eliminating 1,000 jobs (16 percent of its workforce). The goal is to reduce costs by $500 million this year.
Altogether, it’s a multifaceted story with many moving parts, including disciplined operations, cost-cutting, usage growth, and revenue diversification. That last one carries the greatest weight, and the narrative is working so far. We’ll see if the story is strengthened or countered in Q1 earnings on May 6.
