Company Reports

No-moat Snap posted positive first-quarter results, improving on a difficult fourth quarter on the back of improved user monetization. Revenue per user increased year over year for the first time since early 2022, reflecting the strength in the broader advertising market and Snap’s efforts to revive growth. We maintain our $14 per share fair value estimate.

Snap is the maker of one of the most popular social networking apps, Snapchat, which has captured 414 million global daily users as of the end of 2023, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect and that the firm is starting to attract the attention (and dollars) of advertisers. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade.

Snap is the maker of one of the most popular social networking apps, Snapchat, which has captured 406 million global daily users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward over $7 billion in revenue by 2027. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade.

We maintain our Snap fair value estimate of $14. After a 30%-plus decline after hours in reaction to the fourth-quarter results, the shares of this no-moat firm look attractive. Despite a flat user count in North America, Snap’s total user count increased in the fourth quarter. We were pleased with improved monetization in developed markets. We still expect Snap to reach full-year profitability in 2027, driven by user growth, enhanced engagement, improved advertising solutions, and recent cost cuts.

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.

Founded in 2011, Snap is the maker of one of the most popular social networking apps, Snapchat, which has captured 406 million global daily users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward over $7 billion in revenue by 2027. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade.

While Snap has displayed success in attracting new users, it continues to have difficulties bringing in advertisers and increasing user monetization. Snap’s efforts to make its platform easier for advertisers to use its first-party data more effectively and to monetize Spotlight have not yet generated any return for the firm and its shareholders. We are maintaining our $16 fair value estimate and believe investing in this no-moat and Very High Morningstar Uncertainty-rated firm requires patience. While the stock was 3 stars going into the second-quarter earnings release, the 19% after-hours pullback will return it to 4-star territory.

While we find Snap’s struggle to improve user monetization frustrating, we believe opportunities still exist for a platform that continues to grow its user base. In addition to economic uncertainties, Snap’s various ad platform changes have made advertisers more cautious. However, while the firm is a bit slow on the execution front compared with Meta, its strategy is similar—enhance machine learning to help users find relevant content more easily and engage longer, improve on-site ad conversion, and integrate first-party data with advertisers and/or agencies. While first-quarter results and the firm’s guidance do not show it yet, we think the firm will in time attract more frequent ad buyers and will increase the monetization of its growing user base. We are maintaining our $16 fair value estimate for no-moat Snap.

The Joe Biden administration is threatening to ban TikTok from the U.S. and talks about a possible sale of its U.S. operations to an American company have increased. At the same time, China may not approve a sale, as reported by The Information. In our view, the uncertainty surrounding the possible ban or sale of TikTok could benefit Snap, Meta’s Instagram, and Google’s YouTube. We are maintaining our $154, $260, and $16 fair value estimates for Alphabet, Meta, and Snap, respectively.

The collapse of Silicon Valley Bank has created doubt about access to capital for tech firms, but we do not expect any material impact on online media or advertising firms under our coverage and we are not adjusting our fair value estimates on these stocks. The chance of Silicon Valley Bank becoming a contagion did decline a bit as of March 12. While a second bank, Signature Bank, was closed, regulators announced that all deposits at both banks will be accessible beginning on March 13.

Snap reaffirmed a few things at its second analyst day that we have noticed recently, including the strengthening of a network effect as the user count grows, offset by weak engagement and continuing softness in monetization—whether due to Apple’s policies or the economic environment. While newer growth opportunities remain, such as Snapchat+, Snap Map, and the increasing adoption of augmented reality ads, we believe the firm’s impressive user growth should make improvements in advertising products to bring more advertisers on board the firm’s highest priority. Our fair value estimate remains $16, which represents over a 50% upside from where the stock is trading.

Snap reported mixed fourth-quarter 2022 results, as efforts to improve cost efficiencies which began at the end of third-quarter 2022 helped offset modestly weak revenue. The firm also indicated that revenue will likely decline year over year during the current quarter. We have again slashed our fair value estimate to $16 from $27.

Founded in 2011, Snap is the maker of one of the most popular social networking apps, Snapchat, which has captured 265 million users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward nearly $3.8 billion in revenue. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade.

The Wall Street Journal has reported that Meta Platforms could be held accountable for not complying with the General Data Protection Regulation, the European privacy rules that went into effect in 2018. The European Data Protection Board confirmed that it has reached a decision but will not disclose it for at least a month. While Meta is likely to appeal in what the Journal points out will probably be a lengthy process, we think the firm could ultimately be liable for up to $13 billion in fines (around 4% of revenue since the rules went into effect) or up to 2% of our $260 fair value estimate.

For the third consecutive quarter Snap disappointed the Street with miss on the third-quarter top- and bottom-line when compared with the FactSet consensus estimates. While daily average users expanded impressively, monetization remained difficult. In addition to factors such as macroeconomic uncertainty and Apple’s privacy policies, changes in Snapchat user behavior are also increasing hesitancy by advertisers. While these changes may also be hindering ad revenue growth for Meta and Alphabet, we believe it is a lesser concern for these firms.

Snap disclosed its restructuring plan today, from which we had a few takeaways. First, we are pleased that management is prioritizing investments in Snap's core capabilities to generate free cash flow and profitability over investments in products that have high uncertainty regarding their growth and overall contribution to the top and bottom lines in the short and long term. Second, such prioritization is indicative of continuing maturity of the management team, mainly the co-founder and CEO Evan Spiegel, which increases our confidence in Snap not only hitting GAAP profitability but also maintaining it with improved capital allocation, benefiting shareholders in the long run. And third, the firm's third-quarter revenue update, which was above the FactSet consensus estimates, implies that Snap is improving its ad measurement tools, which likely are stabilizing advertising demand. However, this may be offset by continuing uncertainty in the macro environment and competition not only from Instagram but also TikTok, all of which could pressure ad spending on the platform. For this reason, we lowered our projections, resulting in a $27 fair value estimate, down from $30. While no-moat Snap is still attractive at current levels, our preferred names in this space remain wide-moat companies Alphabet and Meta.

Founded in 2011, Snap is the maker of one of the most popular social networking apps, Snapchat, which has captured 265 million users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward nearly $3.8 billion in revenue. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade.

Snap delivered disappointing second-quarter 2022 results as both the top and bottom lines came in short of the FactSet consensus estimates. In addition, with significant uncertainty surrounding advertising demand for the platform, the firm did not provide any financial guidance. However, management expects continuing double-digit user growth in the third quarter. Snap’s latest results display the impact of the macro environment uncertainty in addition to advertisers’ reaction to the effect of Apple’s policies on the platform’s direct response ad measurement capabilities. While Snap’s numbers may also indicate quarterly weakness in other social media platforms, we think on platforms such as TikTok, Meta’s Instagram, and Google’s YouTube, all of which have much larger user bases, the impact may be less.

Founded in 2011, Snap is the maker of one of the most popular social networking apps, Snapchat, which has captured 265 million users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward nearly $3.8 billion in revenue. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade.

In an 8-K filing on May 23, Snap said it had lowered its second-quarter revenue and adjusted EBITDA forecast, mainly citing the Ukraine war and macro headwinds. While its peers may also feel pressure on revenue growth, we think the effect on Meta and Google’s YouTube is likely less as they remain the top platforms for direct-response advertising, which we expect will be affected less than brand advertising. Twitter’s revenue growth will likely be pressured as the platform continues to attract more broad-based brand campaigns. We do not expect spending on contextual advertising, which IAC’s properties attract, to be affected as much. In addition, during economic slowdowns advertisers prioritize purchasing ad inventory from the likes of Meta’s Facebook and Instagram, TikTok, and YouTube over others in the space, including Snap and Pinterest.