Snap Earnings: Impressive User Growth Continues, but Monetization Remains Elusive

Snap Stock at a Glance

• Fair Value Estimate: $16.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Snap Earnings Update

While we find Snap’s struggle to improve user monetization frustrating, we believe opportunities still exist for a platform that continues to grow its user base. In addition to economic uncertainties, Snap’s various ad platform changes have made advertisers more cautious. However, while the firm is a bit slow on the execution front compared with Meta, its strategy is similar—enhance machine learning to help users find relevant content more easily and engage longer, improve on-site ad conversion, and integrate first-party data with advertisers and/or agencies.

While first-quarter results and the firm’s guidance do not show it yet, we think the firm will in time attract more frequent ad buyers and will increase the monetization of its growing user base. We are maintaining our $16 fair value estimate for no-moat Snap.

First-quarter revenue declined 7% from last year. While Snap’s daily average user count continued to grow impressively, up 15% to 383 million, monetization per user weakened year over year for the fourth consecutive quarter, down 19%.

The firm increased its user count in every region including the U.S. (up 2%), Europe (11%), and the rest of the world (27%). Improved monetization in the rest of the world segment (5%) was more than offset by declines in the U.S. (18%) and in Europe (12%). Impressions sold increased 10% from last year, but Snap’s ad platform changes and continuing economic uncertainties further weakened demand for direct response (revenue down 9%) and brand-based advertising (down 12%)—all of which drove prices per ad down 18%.

What is most worrisome to us is the continued difficulties increasing on-site conversions or click-throughs. Most advertisers prefer to see strong click-throughs because they are easier to measure given Apple’s data policies. However, given the improvements in on-site conversions that Meta is experiencing, we also expect Snap’s efforts to generate some return, although likely late in the second half of this year.