Snap’s Q4 Earnings Show Top-Line Growth Came to a Standstill; Recovery Will Take Longer

Snap Stock at a Glance

• Current Morningstar Fair Value Estimate: $16
• Snap Stock Star Rating: 5 stars
• Economic Moat Rating: None
• Moat Trend Rating: Stable

Snap Earnings Update

Snap (SNAP) reported mixed fourth-quarter 2022 results, as efforts to improve cost efficiencies which began at the end of third-quarter 2022 helped offset modestly weak revenue. The firm also indicated that revenue will likely decline year over year during the current quarter.

We have again slashed our fair value estimate to $16 from $27.

Weak Ad Demand Hits Snap’s Revenue Growth

While Snap continues to display solid user growth, which helps increase ad inventory, low advertiser demand has weakened user monetization and revenue growth. Although disappointing demand is partially due to the uncertain macro environment, to our regret, it is also due to what appears to be the inability of Snap and its management to improve the firm’s direct response capabilities and attract advertisers. We commend the firm’s prioritization of profitability and free cash flow. However, we believe the firm must resume double-digit revenue growth, which we now project will not take place until next year, to realize full return on its strategy.

With the focus on operating more efficiently, successfully tapping into other revenue opportunities such as Snap Map and Snapchat+ could take longer. We have lowered our revenue projections to 16% annually through 2027, below 22% previously. With much slower top-line growth, we also now expect Snap to remain unprofitable on a GAAP basis until 2027, compared with our previous assumption of 2026.

Snap Shows Impressive User Growth

Fourth-quarter revenue came in at $1.3 billion, flat year over year, as the impressive 18% growth in users to 375 million which increased ad impressions 8%, was more than offset by a 9% lower average price per ad. Overall time spent consuming content also increased, but partially offset by continuing weakness in engagement on friends Stories.

Weaker macro environment drove demand for brand advertising lower while ongoing difficulties with ad performance measurement and lack of Spotlight monetization negatively affected demand for direct response campaigns.