Snap Earnings: User Growth Continues, but Monetization Slower Than We Anticipated

Users keep jumping onto Snap platforms, but advertisers remain hesitant. However, during a historically slower seasonal third quarter, the rate of decline in revenue generated per user slowed and, surprisingly, sequential growth accelerated. While this doesn’t represent a turnaround in user monetization, we think it indicates some improvement in Snap’s data analytics and performance measurement tools, increasing the likelihood that advertisers may use Snap as more than just an ad testing platform. Assuming no significant impact from current geopolitical factors on advertising, we expect lower-single-digit user monetization growth in 2024 and accelerating beyond that, creating operating leverage and resulting in full-year profitability in 2027. We assume a longer time for returns on Snap’s investments in artificial intelligence for users and dynamic advertising tools for advertisers to take hold; this combined with slower top-line growth will limit margin expansion during the next five years. Our adjustments result in a $14 fair value estimate for no-moat Snap, down from $16.