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

Users keep jumping onto Snap SNAP platforms, but advertisers remain hesitant. However, during a historically slower seasonal third quarter, the rate of decline in revenue generated per user slowed and, surprisingly, sequential growth 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 Snap as more than just an ad testing platform. Assuming no significant impact from current geopolitical factors on advertising, we expect lower-single-digit user monetization growth in 2024 and accelerating beyond that, creating operating leverage and resulting in full-year profitability in 2027. We assume a longer time for returns on Snap’s investments in artificial intelligence for users and dynamic advertising tools for advertisers to take hold; this combined with slower top-line growth will limit margin expansion during the next five years. Our adjustments result in a $14 fair value estimate for no-moat Snap, 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 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 U.S. advertisers 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 latter reported strong third-quarter growth.