Snap Earnings Disappoint for Third Consecutive Quarter

Snap Stock at a Glance

• Current Morningstar Fair Value Estimate: $27.00
• Snap Stock Star Rating: 5 Stars
• Economic Moat Rating: None
• Moat Trend Rating: Stable

Snap Earnings Update

For the third consecutive quarter, Snap disappointed the Street with a miss on the third-quarter top and bottom lines compared with the FactSet consensus estimates. While daily average users expanded impressively, monetization remained difficult. In addition to factors such as macroeconomic uncertainty and Apple’s privacy policies, changes in Snapchat user behavior are also increasing hesitancy by advertisers. While these changes may also be hindering ad revenue growth for Meta and Alphabet, we believe it is a lesser concern for these firms.

Snap provided some details about the fourth quarter, pointing to results below the FactSet consensus estimates. We have lowered our near-term projections but are maintaining our $27 fair value estimate, as we believe the firm’s continuing user growth will bring more advertisers on board in the medium and long term. Putting aside the macroeconomic and geopolitical issues that are affecting overall ad spending, we believe Snap is addressing its user monetization issue correctly as it not only continues to focus on user growth—but also on enhancing the technology and tools for advertisers to both purchase ads and more accurately measure the performance of those ads. In addition, we applaud Snap’s capital allocation, as it announced a $500 million share buyback given its progress toward generating free cash flow consistently. Shares of this no-moat firm are down 27% afterhours and are trading at a 70% discount to our fair value estimate. However, this investment requires patience.

Total revenue increased 6% to $1.13 billion driven mainly by user count, which was up 19% from last year to 363 million. The increase in users lifted ad impressions sold 8%, but weak demand from advertisers drove the average price down 3%. As a result, revenue per user declined 11% year over year to $3.11.