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Snap's Blowout Results: A Good Sign for Digital Advertising Companies?

By Daniel Sparks – Oct 22, 2020 at 7:05AM

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Revenue was more than $100 million above analyst estimates -- and the holiday quarter looks promising, too.

Snap (SNAP -5.79%), parent company of photo- and video-sharing social network Snapchat, absolutely obliterated analyst estimates when it reported its third-quarter results after market close on Tuesday. The news sent shares of the growth stock soaring more than 30% on Wednesday.

While Snap investors should certainly love the update from the social network, the news also bodes well for shareholders of almost any company in the business of digital advertising. Snap's strong performance suggests that advertising spend is likely back in full force.

A group of young people taking a selfie.

Image source: Getty Images.

Massive growth

Snap's third-quarter revenue surged 52% year over year to $679 million. Analysts, on average, had expected revenue to be about $123 million lower, or $555.9 million.

Ad spend on Snapchat skyrocketed as daily active users increased 18% year over year to 249 million. Average revenue per user was up 28% year over year. 

There was a huge recovery in Snap's revenue after Q2 revenue growth slowed to a rate of just 17%. Consider the sequential jump in Snap's total revenue between Q2 and Q3. After reporting $454 million in second-quarter revenue, third-quarter revenue was $679 million, representing 50% growth. Growth was even faster in North America, where revenue rose 61% sequentially.

It doesn't stop here. Snap seemed convinced that strong momentum would persist in Q4. "Assuming that the current favorable operating conditions persist, and that the holiday season materializes in line with what we have experienced in prior years," explained Snap CFO Derek Andersen in the company's third-quarter earnings call, "we believe that year-over-year revenue growth of 47% to 50% is attainable in Q4."

Who else could benefit?

These "favorable operating conditions," of course, will likely benefit other digital advertising companies as well. Deutsche Bank analysts wrote in a note to investors following the Snap report that the blowout results imply a "bonanza for online advertising." 

Several analysts turned their attention to Pinterest (PINS -4.38%) following Snap's results. Goldman Sachs analyst Heath Terry lifted his price target for the stock from $37 to $61, citing Snap's third-quarter results and strong app download data. Bank of America analyst Justin Post upgraded Snap stock from a neutral to a buy rating, also pointing to Snap's better-than-expected results.

Other likely beneficiaries of a strong advertising environment include programmatic advertising company The Trade Desk (TTD -2.77%), online search engine giant Alphabet (GOOG -1.65%) (GOOGL -1.40%), and social network Facebook (META -1.06%), among others. All three of these companies' stocks moved meaningfully higher on Wednesday as investors digested Snapchat's impressive results. Additionally, Pinterest stock was up as much as 14.8% at one point on Wednesday.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, Pinterest, and The Trade Desk. The Motley Fool has a disclosure policy.

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