Snap Earnings: Still Awaiting an Ad Spending Boost as Users and Engagement Increase

Key Morningstar Metrics for Snap

• Fair Value Estimate: $14.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snap’s Earnings

We maintain our fair value estimate of Snap SNAP at $14. After a 30%-plus decline after hours in reaction to the company’s fourth-quarter results, its stock looks attractive. Despite a flat user count in North America, Snap’s total user count increased in the 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.

Total revenue increased 5% from last year to $1.36 billion, driven by more users (up 10%) and a slowing decline in average revenue per user. We estimate that the firm’s subscription offering, Snapchat+, contributed nearly 5% of revenue. We also estimate that user engagement displayed improvement, though not to the same extent as Meta’s apps, which drove a 4% year-over-year increase in ad supply. Ad demand remained slightly weaker than in the prior year, reducing ad prices by 2% on average. Revenue per user increased year over year in the U.S. for the first time since the second quarter of 2022, up 2%, and was up for the second consecutive quarter in Europe (5%). The 19% jump in users in other regions outpaced ad demand, which reduced revenue per user in those regions by 6%, the first decline in the last four quarters.

The operating loss of $249 million was slightly better than last year’s $288 million loss. The gross margin was lower mainly due to the artificial intelligence-driven increase in infrastructure costs, and higher general and administrative expenses were more than offset by declines in those for research and development and sales and marketing from last year. Adjusted EBITDA came in at $159 million (12% margin), lower than $233 million (18% margin) last year, mainly due to lower restructuring costs and stock-based compensation, which are added back to operating losses.