Snap Earnings: User Growth Continues, but Monetization Slower Than Anticipated

Key Morningstar Metrics for Snap

• Fair Value Estimate: $14.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snap’s Earnings

Users keep jumping onto Snap SNAP platforms, but advertisers remain hesitant. However, during the historically slower seasonal third quarter, the rate of decline in revenue generated per user slowed, while sequential growth surprisingly 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 it as more than just an ad testing platform.

Assuming no significant impact from current geopolitical factors on advertising, we expect user monetization growth in the low single digits in 2024 and accelerating beyond that, creating operating leverage and resulting in full-year profitability in 2027. We assume it will take longer for returns on Snap’s investments in artificial intelligence for users and dynamic advertising tools for advertisers to take hold. Combined with slower top-line growth, this will limit margin expansion during the next five years. Our adjustments result in a $14 fair value estimate, down from $16.

Total third-quarter revenue of $1.19 billion increased 5% from last year. The firm’s user count of 406 million was up 12% year over year and 2% sequentially. The solid user growth pushed the number of ad impressions sold 7% higher from last year, but low demand from advertisers pushed the average ad price down 5%. User monetization increased from last year in Europe (up 15%) and the rest of the world (up 8%), but declined in the United States (down 4%), as we think more advertisers there are demanding better direct response capabilities.

However, Snap is slowly making headway, as its direct response growth (up 3%) outpaced brand ads (flat year over year). The firm continues to trail YouTube in advertising recovery, as the competitor reported strong third-quarter growth.