Shares of Snap Inc. (NYSE: SNAP) surged on Wednesday, punching above the $17 IPO price for the first time in more than a year after the social media company reported better than expected earnings and gave upbeat guidance for the current quarter.

 

Q2 Earnings Summary

  • Earnings: -$0.06 per share
  • Revenue: $388 million
  • Daily active users: 203 million
By focusing on its core base of younger people, Snap managed to grow its daily active users to 203 million from 188 million a year ago.

Snap, the parent company behind Snapchat, reported a second-quarter loss of $0.06 per share on revenue of $388 million. Analysts in a median estimate were expecting a loss of $0.10 per share on revenues of $369.7 million, according to Refinitiv.

Evan Spiegel, Snap’s CEO, said the strong quarterly results reflect “several transitions” completed over the past 18 months. A key part of that transition brought Snap back full circle: Instead of trying to attract all users, the company zeroed in on its core base of younger people. As a result, Snap managed to grow its daily active users to 203 million. This time last year, Snap’s daily user base had shrunk to 188 million from 191 million.

An increase in daily active users, combined with declining unit costs, allowed Snap to increase its gross margin to 46% from 30% a year earlier.

The company now expects to generate as much as $435 million in revenue this quarter. It also expects between 205 and 207 million daily active users, well above the median 195.5 million expected.

 

SNAP Spikes

Snap’s stock price launched through the stratosphere on Wednesday, gaining 18.8% to $17.61. It marked the first time in over a year that the company’s stock closed above the IPO price.

Snap Share Price 1 Year - Jul 25 2019

Source: Yahoo Finance

SNAP is now trading at its highest level since Feb. 26, 2018. The stock has more than tripled in value this year and is up 253% from its December low of $4.99.

At current values, Snap has a total market capitalization of $23.8 billion. Some analysts are concerned that the company is still vastly overvalued. As Michael Nathanson recently pointed out, the company’s forward revenue multiple is probably around 11, giving it “one of the richest valuations we have ever seen.”

 

Conclusion

After a year of doom-and-gloom, it’s pretty obvious that Snap has turned things around at an operational level. Whether this is enough to justify its lofty valuation is still too early to tell. It’s clear from the company’s forward guidance that 2019 is shaping up to be a year of transition for the social media platform. If augmented reality continues to take off, Snap could see its user base skyrocket pretty quickly.

Disclaimer: Author holds no investment position in Snap at the time of writing.