Snap grew 10% thanks to support from artificial intelligence and paid users

• Snap shares rose 10% after its third-quarter revenue beat Wall Street expectations.
• Snap’s revenue rose 15% to $1.37 billion, beating analysts’ estimates of $1.36 billion.
• Snap’s revenue growth was driven by artificial intelligence features and growth in Snapchat+ users.

Snap shares rose 10% in late trading after reporting third-quarter revenue that beat analysts’ expectations, following the introduction of a broad range of artificial intelligence features and growth in the number of paid users.

Snap, which is best known for its photo-sharing service, saw quarterly revenue rise 15% year over year to $1.37 billion, slightly beating analysts’ estimates of $1.36 billion.

Snap CEO Evan Spiegel said efforts to improve engagement, such as AI-powered mash-up features and the use of machine learning for better personalization, are already showing early signs of paying off.

Spiegel said Snap has also introduced artificial intelligence tools for creators, which it has recently been offering to implement on the platform.

“In the third quarter, we began testing a new AI-powered video creation tool that allows creators to create engaging videos using a simple text or image prompt,” Spiegel said at a press conference Tuesday. “Our efforts to support creators contributed to an approximately 50% year-over-year increase in the number of creators publishing content in the third quarter.”

The social media platform added 11 million daily active users in the third quarter, up 9% year-over-year. However, Snap predicts that the number of users will grow by only 8 million in the current quarter to 451 million.

Daily active users are a measure of how much people want to interact with the platform. This is an important metric for social media companies because an increase in the number of users usually means more money for advertising.

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Paid subscribers and artificial intelligence are driving Snap’s growth

The CEO also attributed the revenue growth to paid subscriptions.

Snapchat+, a $3.99-a-month feature launched in 2022 amid falling advertising revenue, reached 12 million subscribers in the third quarter. Subscriber numbers more than doubled from last year and generated about $123 million in quarterly revenue.

The social media platform has also overhauled its advertising business in recent years. The company has shifted from advertising that builds brand awareness to higher-priced direct response advertising, which contains a call to action and entices users to buy a product or visit a website.

Despite factors that have positively impacted Snap, the company has consistently reported losses, including a $153 million loss in the third quarter. The company reported a loss of $368 million in the third quarter of 2023.

Snap’s user base of 443 million is small compared to Meta’s 3.3 billion users and TikTok’s more than 1 billion users, with whom Snap competes directly for advertising revenue.

The performance gap between Snap, Meta and Google continues to widen, further accelerating Snap’s loss of market share and declining revenue growth, Jefferies analysts led by James Heaney wrote in an earnings call last week.

Over the past four quarters, the company has missed analysts’ expectations twice. Since the beginning of the year, its shares have fallen more than 35%.