VALUATION HIGHLIGHTS

1. North America Advertising constitutes 49% of the Trefis price estimate for Snap's stock.
2. International Advertising constitutes 35% of the Trefis price estimate for Snap's stock.

WHAT HAS CHANGED?

Latest Earnings

For Q4 FY 2023, Snap reported revenues of $1.36 billion, 5% more than the year-ago period. Net loss was $248 million, compared to Net loss of $288 million in the previous year. Diluted earnings were recorded at -$0.15 compared to -$0.18 in the previous year.

Impact of Coronavirus

IT software and Services industries suffered from a fall in demand for software and web services at the start of the pandemic as consumers focused solely on essentials, not discretionary products. However, it recovered over the subsequent quarters, with companies having a portfolio of software and services aimed at remote collaboration benefitting the most. However, this growth slowed down in FY 2022 and FY 2023 due to the tough macroeconomic scenario. Revenues for full-year 2023 were $4.6 billion - identical to the figure in 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Snap's value that present opportunities for upside or downside to the current Trefis price estimate:

Stronger than expected ARPU growth in North America

Snap's Average Revenue Per User (ARPU) in North America remains the single most important driver of its valuation. Snap has taken a cautious approach to its advertising business, rolling out ads only in 2014, while ensuring that ads are engaging and non-intrusive to improve the user experience and protect its advertisers' brands. We expect the company's advertising revenues per North American user to rise from around $32.3 in 2022 to over $35.6 by 2025. If the company can increase its ARPU to over $45 by the end of the forecast period, driven by higher engagement levels and demand from advertisers, it could increase our price estimate by about 4%. On the other hand, if ARPU grows to only about $38 due to hiccups in the monetization strategy or stronger competition for mobile ad dollars, this could reduce our valuation by around 4%.

For additional details, select a driver above or select a division from the interactive Trefis split for Snap at the top of the page.

BUSINESS SUMMARY

Snap refers to itself as a "camera company," but the company's flagship product is the smartphone app Snapchat, which allows its users to communicate via ephemeral short videos and images. The company had 300 million average daily active users in 2021. Snap earns revenue primarily via advertising in its Snap stories and via creative tools such as filters and lenses. The company ventured into the hardware space in late 2016, with its product Spectacles - sunglasses that allow wearers to capture short video clips.

SOURCES OF VALUE

We estimate that the company's North American Advertising business is more valuable compared to its International Ads and Spectacles due to:

Stronger ARPU In North America

Snap's average annual revenue per daily active user in North America stood at about $32.3 in 2022, roughly 6x the figure for international markets. This is due to weaker purchasing power in many international markets, as well as Snap's focus on scaling up its U.S. ad business before focusing on international markets. While we expect ARPU growth rates in international markets to be slightly higher over the long term, we believe that the spread between International and North American ARPU will remain significant.

Thicker margins for Internet businesses

Internet services businesses such as social networks and messaging have high margins, as direct costs (such as cloud infrastructure) are relatively small in proportion to revenues, with other costs such as R&D remaining largely fixed. This is in contrast to hardware businesses such as Spectacles, which see significant costs relating to manufacturing, distribution, and inventory management.

KEY TRENDS

Snap poised to benefit from the evolution of the ad market

Snap stands to gain significantly from several ongoing trends in the advertising market:

1. The shift of ad dollars to mobile: Mobile advertising constitutes the fastest-growing segment of the ad market, and is expected to continue growing exponentially. In contrast, all other advertising spending is expected to decline. This should help Snapchat, as it is a mobile-only platform.

The shift from traditional media also means that advertisers are having a difficult time reaching younger audiences, providing an opportunity for Snapchat, which primarily caters to younger demographics. About 85% of Snap's users in the United States are in the 13 to 34 age group, compared to under 50% for Facebook.

2. Video opportunity: Video ads are a major growth area within the mobile space. This should prove beneficial for Snap, given that it is primarily a video-focused platform - helping Snap capture some of the ad dollars currently going toward TV ads.

3. Focus on U.S. markets: Advertising spends in international markets are still much lower compared to developed markets such as the U.S., given the lower purchasing power. Snapchat's user base is largely concentrated in North America, where ad spends are likely to remain significantly higher for the foreseeable future.

Maintaining a focus on the platform

Snap ventured into the hardware space with its Spectacles wearable camera in late 2016. It referred to itself as a camera company in its IPO prospectus, indicating that it is likely willing to take risks to create innovative camera products. While such products could help Snap improve revenues, we believe the core Snapchat platform - which engages over 375 million (2022) users daily - will remain the company's most valuable asset. Snap must ensure its other endeavors enhance the platform - via increased customer loyalty or engagement. The company's platform - which facilitates interactions between users - will likely be more valuable compared to products, as products require a significant amount of resources, time, and capital to develop, and need to compete based on differentiation. This platform-focused strategy has paid off handsomely for companies such as Facebook and Google. To the extent that Snap keeps its hardware ambitions in line with bolstering the core platform, the company should be able to justify and potentially improve its valuation.

The Facebook threat

Snapchat has demonstrated that it understands the latent needs of users in the 18-24 age group - a highly sought-after demographic for advertisers - better than most Internet companies. The Snapchat app has evolved in recent years, with various features being well-received by its core user base. The app began with disappearing messages as its core interaction, after which Stories and Discover were added, essentially turning Snapchat into a media platform. However, Snap faces a significant threat from social media behemoth Facebook, which has posted substantial growth driven by its early start and shrewd acquisitions such as WhatsApp and Instagram. Facebook has been implementing Snapchat-like features such as Stories on WhatsApp and Instagram, and there is a possibility that this could hinder Snap's growth - particularly in international markets, where Facebook products are widely used.