There was much to admire about Snap's (SNAP +1.50%) third-quarter financial results, released Wednesday morning, and data on growth for a new feature holds some promise for the tech stock.
The report showed revenue of $446 million for the quarter, an increase of 50% year over year. And Snap's net loss of $98 million was a significant improvement over the year ago. Most encouraging was news that the company's daily active users of its Snapchat app hit 210 million, improving 13% year over year.
That being said, not everything about the company's earnings report was applauded. In particular, Snap projected fourth-quarter revenue between $540 million and $560 million. While that would be an improvement year over year, the midpoint of the guidance puts revenue slightly below analyst estimates for the period.
Still, it was a good performance overall. And digging deeper into the report, perhaps the most noteworthy aspect was the growth of its Discover platform on Snapchat.
Image source: Getty Images.
Discover is making headway
The Discover feature of the app has often been touted as a major growth opportunity for the company. Not only does it allow users to follow their friends' Stories (Snapchat's bread and butter), but it also features content from a variety of celebrities and popular media organizations. Most importantly, the Discover platform allows Snap to deliver its own original content to Snapchat users. The company recently released a slate of original shows available exclusively on Discover, which it describes as a "vertical video platform."
During the third quarter, Discover made some headway. The amount of time spent on the feature by the average user increased by 40% year over year, while time spent on premium content within Discover grew by 55% among international users. This wasn't a fluke -- the company's data shows that the platform is becoming more popular. More than 100 channels on Discover combined for a monthly audience of roughly 10 million viewers. Considering how crucial user engagement is for Snap, the Discover platform -- with its increasing following -- could be one of the keys to the company's future growth.
Snap still faces strong competition
Despite Discover's encouraging signs, the overall story remains the same for the social media company. Snap has always had trouble generating a strong and durable competitive advantage because other companies can easily copy most of the features offered on Snapchat. Facebook's Instagram famously and successfully did so with Snap's Story feature. Discover is also in danger of strong competition, perhaps most notably from Quibi, a new mobile platform featuring premium short video series that is set to launch in April of next year.
Unlike Snapchat, Quibi will be a paid service, but much of the platform's content will feature A-list celebrities, which means it is likely to attract a relatively large audience. Among those taking part in projects on Quibi are Steven Spielberg and Jennifer Lopez. Quibi recently announced it had secured $100 million in ad sales about nine months before being launched. While no one knows exactly how this will affect Snap's user growth and engagement, an increasingly competitive landscape is the last thing the tech company needs at this point.
The key takeaway for investors
Snap does have other features it can rely on to grow its user base, including its augmented reality platform and its Games platform. But if Discover loses ground to Quibi or other competitors, it could spell serious trouble for the company and its investors.
