Snap Earnings: Strength in International Markets Drives Strong Outlook

Key Morningstar Metrics for Snap

• Fair Value Estimate: $9.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Snap’s Earnings

Snap SNAP reported third-quarter revenue of $1.507 billion, up 10% year over year, due to strength in international markets. Adjusted EBITDA margin came in at 12%, up 200 basis points from a year ago, due to cost efficiencies and a greater mix of high-margin products like Sponsored Snaps and Spotlight.

Why it matters: Despite persisting weakness in North American markets, advertising revenue from international markets continues to grow, driven by improved direct advertising monetization and increased demand from small and mid-sized businesses.

• Continued weakness in large North American accounts client business drove softer sales for the quarter, though international strength offset some pressure. Despite ongoing initiatives aimed at driving a recovery, we expect North American growth to remain subdued in the near term.
• We like that Snap is continually investing in growing monetization engines like Snapchat+ and sponsored Snaps. While these initiatives have yet to contribute materially to growth, the persistence of current adoption trends may offer some upside to our valuation.

The bottom line: We maintain our fair value estimate for no-moat Snap at $9 per share. Given the solid quarterly performance, shares were up 15% during after-hours trading Nov. 5, inching closer to our unchanged valuation. We now view shares as fairly valued.

Coming up: For the fourth quarter, the firm expects sales of $1.7 billion at the midpoint and an adjusted EBITDA margin of about 17%. Overall daily average user count is expected to decline in the next quarter due to the mandated rollout of platform-level age verification in countries like Australia.

• Given recent results, we have trimmed our North America estimates for revenue and user growth while raising our revenue outlook for international markets, where plenty of growth, both in ad loads and monetization improvements, remains.