Snap Q1 Earnings Preview: How Will Facebook’s Assault Impact User Growth?
Snap (NYSE:SNAP) is expected to publish its Q1 2017 earnings on May 10, reporting its first set of quarterly results as a public company. The earnings should provide an important proof point regarding the company’s user growth and monetization prospects, as larger rival Facebook continues to roll out its own versions of Snapchat’s most popular features. The stock, which debuted at around $27 on the NYSE in early March, is currently trading well below that. Below we take a look at the two key factors we will be tracking when the company reports earnings.
We remain relatively bearish on Snap’s stock, with a price estimate of $17 per share, which is roughly 25% below the current market price.
See Our Full Model And Analysis For Snap Here
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User Growth In Focus As Facebook Broadens Assault On Snapchat
The most important factor to watch in Snap’s earnings release will be its daily active user growth – which is viewed as the most important valuation lever for social media companies. Snap’s user growth slowed down sharply in Q4’16, as it added just about 5 million new users globally during the quarter, compared to around 15 million users, on average, during the prior three quarters. While Snap attributed the slowing growth to technical difficulties, the slowdown also coincided with Facebook launching its own version of Snapchat’s popular Stories feature on Instagram. As of early April, the Instagram Stories feature reached a daily active user base of about 200 million, eclipsing Snap’s total user base (161 million as of Q4’16).
Facebook launched a broader assault on Snap towards the end of Q1, rolling out Stories to its 1.7+ billion Facebook users, along with other Snap-like features such as camera effects (similar to Snap’s lenses). Facebook also rolled out the Stories feature to its 1 billion+ WhatsApp users. There is a possibility that Facebook’s massive scale and its fast-follower strategy of copying Snap’s most popular features could impact Snap’s user growth adversely, particularly in international markets. Our valuation model assumes that Snap will add a total of about 30 million DAUs this year (~7.5 million per quarter), and to the extent that Snap’s reported figures diverge from this metric, we may have to revisit our price estimate.
Monetization Should See A Solid Improvement
Snap’s average revenue per daily active user for North America has been seeing solid growth, rising from levels of around $0.70 per quarter in Q4’15 to about $2.10 in Q4’16. However, this is still far below the ~$20 that Facebook garnered per North American user in Q4’16. This implies that Snap may have barely scratched the surface of its overall monetization potential. There are multiple trends that could help the company improve its ARPU, including a young and highly engaged user base (Snap’s DAUs spend ~ 25 to 30 minutes per day on the app), visually rich and engaging advertising formats, as well as the company’s increasing pivot towards programmatic advertising, which could make ad sales more seamless. We will be closely watching how Snap’s monetization process is coming along amid the heightened competition from Facebook.
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