How Snap’s Shift To Programmatic Is Impacting Its ARPU

Among the biggest drivers of Snap’s (NYSE:SNAP) valuation over the long term will be the growth in its average revenue per user (ARPU). Our $15 price estimate for the company assumes that it will grow its overall annual ARPU from under $5 currently to over $25 by 2024. However, Snap has been faltering on this front in recent quarters, with quarterly ARPU coming in at $1.17 during Q3, up from $0.84 a year ago, but well below the $1.30 consensus Wall Street forecast. The slower than expected growth was primarily due to the company’s increasing shift to programmatic ad sales from direct sales, which resulted in lower rates. In this note, we take a look at some of the factors that could drive the company’s ARPU over the longer term.

Trefis has a $15 price estimate for Snap, which is ahead of the current market price.

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CPM Rates Plummet, But Things Will Improve As Volumes Rise

Snap has been increasingly automating its advertising sales. Last year, the company began rolling out an API (application programming interface) that allowed it to sell some of its ad inventory via third parties to marketers digitally while launching its self-serve ad manager – which allows advertisers of all sizes to buy and manage ad campaigns on Snapchat – in May. The company said that it delivered roughly 80% of its ad impressions programmatically during Q3, up from 60% in Q2 and none a year ago. However, the shift from direct sales to an unreserved auction model has caused the price of its ads to decline significantly, with CPMs (cost per thousand impressions) falling by more than 60% year-over-year in Q3.

That said, programmatic advertising should help Snap accelerate its monetization in the long run. For instance, Snap said that as it adds more users to its self-serve platform, multiple advertisers will effectively compete for the same ad impression, driving ad prices higher. In Q3, Snap said that the auctions that had multiple bidders resulted in prices that were roughly 40% higher compared to uncontested auctions. Snap has also noted that revenues from small and medium-sized businesses have tripled over the last quarter, indicating that the self-serve platform is gaining traction, allowing the company to address a market which it has largely ignored in the past. Snap’s recent moves to improve its measurement and analytics could also help it court more advertisers, and in turn drive volumes. In June, it acquired a startup called Placed, which can track activities such as store visits and offline purchases, helping to measure ad efficacy.  Snap’s revenues could also benefit from better targeting of its advertisements. The company recently launched “audience filters,” which enable advertisers to target users with a sponsored filter based on parameters that include their location, gender, interest, age, and the time of day.

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