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Stock Analyst Update

Snap Disappoints Again; Shares Fairly Valued

We’re lowering our fair value estimate after Snap continues to find it difficult to compete against Facebook.

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 Snap (SNAP) reported third-quarter results below expectations as the firm’s disappointing user count supports our view that Snap lacks a network effect moat source. Impact of ongoing sluggishness in user growth is apparent in revenue generated per user as that figure nudged up only slightly during the quarter. With what appears to be increasing difficulty faced by management to accelerate user growth combined with lower ad prices, we further lowered our top- and bottom-line projections for Snap. Our updated model now yields a $14 per share fair value estimate, lower than our previous $16. Although the stock is down 17% in after-hours and trading around $12.50, we recommend a wider margin of safety before allocating capital to this no-moat and very high uncertainty name.

Snap’s total revenue grew 14% and 62% sequentially and year-over-year, respectively, to $208 million. While those growth figures seem impressive, in our view, they are disappointing for an early stage growth firm. Snap’s daily active user count, or DAU, grew only 2% sequentially, or 16% year over year, as the difficulties that Snap faces when competing against  Facebook (FB) are ongoing. In addition, the firm’s average revenue per user, or ARPU, grew only 39% year over year, significantly lower than the 110% growth we saw in second quarter, and indicative of lower prices paid by advertisers per Snap ad impression or inventory. While we agree this is partially due to more ads sold on Snap’s programmatic platform, we note that without an impressive user growth, we don’t foresee much stabilization or possibly increase in ad prices to accelerate ARPU growth. In our view, advertisers may hesitate to jump onboard the Snap automated platform, which likely will result in lower bidding on Snap’s ad inventory, keeping ad prices low.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.