Snap Earnings: Ad Platform Error and Persistent Weak Monetization Drag Revenue Growth

Key Morningstar Metrics for Snap

• Fair Value Estimate: $11
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snap’s Earnings

Snap SNAP reported second-quarter revenue of $1.3 billion, up 9% year over year, largely due to strength in European markets. Adjusted EBITDA margin was 3.1%, down 130 basis points year over year due to greater infrastructure, legal, and personnel costs, and weaker monetization.

Why it matters: Snap posted subdued results as ongoing geopolitical tensions tightened digital ad budgets. Average revenue per user was flat despite a 9% year-over-year growth in the user base, implying continued weakness in its monetization engine.

• Advertising revenue grew a weak 4% year over year due to a temporary ad pricing error that led to some ad campaigns clearing at a lower price. The slowdown is also attributable to the cessation of the de minimis exemption leading to Chinese brands like Temu and Shein lowering ad spending.
• Snap’s weak monetization engine remains a hurdle to its performance as it continues to lag its peers who have already reported. New initiatives like Snapchat+ and Sponsored Snaps show some early signs of driving better monetization, but are yet to contribute meaningfully to overall growth.

The bottom line: We reduce our fair value estimate for no-moat Snap to $9 per share from $11 previously. Shares dropped 15% during after-hours trading and trade at a light discount compared with our updated valuation.

Coming up: Management plans to continue investing heavily in artificial intelligence offerings and kept infrastructure per daily active user and adjusted operating expense guidance unchanged at $0.85 and $2.68 billion at the midpoint, respectively. Third-quarter revenue is expected to be $1.49 billion at the midpoint.

• The weaker-than-expected third-quarter revenue and full-year guidance imply lower profitability than our previous estimates. Our updated model reflects guidance and our more cautious near-term expectations around persistent weakness in Snap’s monetization engine.