Snap Earnings: User Additions and Improving Monetization Mark a Solid Quarter

Key Morningstar Metrics for Snap

• Fair Value Estimate: $12.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snap’s Earnings

Snap SNAP reported decent third-quarter earnings that included a mix of strong user growth and improving monetization, as measured by average revenue per user. Growth in users and ARPU was broad-based, showing across all of Snap’s three geographic end markets.

Why it matters: In a tough digital advertising space, Snap has to simultaneously increase its ARPU while expanding its user base as it competes with Meta Platforms META, TikTok, and Pinterest PINS for user eyeballs.

• Parsing the firm’s 15% year-over-year sales growth for the quarter, we were encouraged by the 9% expansion in daily active users. Additionally, total time spent watching content increased by 25% year over year, indicating improving engagement.
• We also liked the 6% year-over-year growth in ARPU, which rose to $3.10 for the quarter. In particular, the firm saw stronger monetization in Europe (ARPU up 19% year over year) and Rest of World (14%) than in North America (9%).

The bottom line: We maintain our fair value estimate of $12 per share for Snap, and reiterate our view that while we believe the firm has growth potential, especially as it expands its global user base, its weak monetization and high expenses will prevent near-to-medium-term profitability.

• Investors were certainly happy with the results, sending the shares up sharply after hours. After accounting for this action, we view the stock as fairly valued.

Coming up: Management guided to fourth-quarter sales in the range of $1.51 billion-$1.56 billion, implying a 13% annual growth rate at the midpoint of guidance. On the bottom line, the firm expects fourth-quarter adjusted EBITDA of $210 million-$260 million.

• We view both targets as achievable and roughly in line with our model.