Snap Earnings: Advertisers Still Not Coming to the Platform Despite Impressive User Growth

Snap Stock at a Glance

• Fair Value Estimate: $16.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Nine

Snap Earnings Update

While Snap 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, a post-report pullback returned it to 4-star territory.

Total revenue came in at $1.07 billion, down 4% from last year. Snap increased its daily average users to 397 million (up 14% year over year and 4% sequentially), but revenue generated per user declined 16%. Users in the rest of the world segment (51% of total users) increased by 25%, followed by a 9% increase in Europe (24% of total users) and 2% growth in the United States (25% of total users). With more users and more engagement, the number of impressions sold increased 5% from last year, but average price per impression declined 12% as the firm continues to enhance its advertising platform to attract more advertisers.

Snap Struggling to Draw Back Advertisers

Unlike Google’s GOOG, GOOGL YouTube, Snap is having difficulties attracting brand-based advertisers back. Snap drew more brand-based advertising prior to the pandemic but has seen demand weaken in recent quarters. Revenue from brand-based and direct-response advertising declined 8% and 7%, respectively.

Operating loss of $404.3 million was higher than last year’s $400.9 million loss, mainly due to higher fees paid to cloud providers as the firm increases its investments in machine learning and overall artificial intelligence. Decline in all operating expense line items as a percentage of revenue was impressive, in our view, given Snap’s continuing user growth.

We expect improvement in user monetization in the fourth quarter of this year. In our view, that is enough time for early indications of Spotlight revenue growth to materialize. The firm needs to demonstrate overall improvement in its ad measurement capabilities and indicate whether the enhancements of its various content creation tools can more effectively bring together advertisers and its most popular content creators or influencers. We’re also waiting to see whether generative AI features like My AI will keep content creators and users engaged.