On Friday, Snap (NYSE:SNAP) received an upgrade from HSBC from a 'Reduce' to a 'Buy' rating, with the price target being increased to $15.10, up from the previous $10.00. This change in stance comes after Snap reported a robust first quarter for 2024, with revenues and earnings surpassing HSBC's estimates and the Visible Alpha consensus.
Snap disclosed its first-quarter earnings after the market closed on Thursday, revealing revenues of $1,195 million, a 21% year-over-year increase. This figure exceeded HSBC's projections by 7%. The company's gross profit also saw a significant rise to $620 million, up 13% from the previous year and 14% higher than HSBC's estimates. This was partly due to service provider credits which led to reduced infrastructure costs. Adjusted operating expenses were reported at $619 million, a modest 3% year-over-year increase, which was 6% lower than HSBC's expectations, thanks to a reduction in headcount by 7%. Furthermore, Snap's adjusted EBITDA was a notable $46 million, a 173% increase over HSBC's estimates, with diluted earnings per share at $0.03, also up 173% against expectations.
Management at Snap provided guidance for second-quarter revenues of $1,240 million, which is above the consensus estimate of $1,215 million. Following the announcement, Snap's share price saw a 20% increase in post-market trading.
HSBC's optimistic outlook for Snap is based on the acceleration of top-line growth and the successful adoption of new products. The upgrade reflects the company's progress in reducing dependence on brand awareness advertising, as direct-response ad revenues grew by 17% year-over-year. Additionally, Snap's efforts in diversifying its revenue streams are paying off, with the SNAP+ subscription service adding 2 million subscribers in the first quarter of 2024.
The new price target of $15.10 represents a 32% upside to Snap's closing share price on April 25, 2024. HSBC has also increased its forecast for Snap's revenue compound annual growth rate (CAGR) from 12% to 15% for the period from 2023 to 2028 and raised the target EBITDA multiple to 13 times from approximately 11 times previously. Despite the positive outlook, HSBC notes potential risks such as the fragile macroeconomic recovery, competitive pressures from increased AI spending, and the possibility of Snap's "Spotlight" feature cannibalizing higher-margin formats.