Why We Increased Our Price Estimate For Snap

+15.60%
Upside
11.45
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SNAP
Snap

We have increased our price estimate for Snap (NYSE:SNAP) by 15% to about $17.50, to account for the recent strength in the company’s daily active user additions and its progress in shifting to a programmatic sales model. The primary changes to our valuation model include slightly higher gross margins, lower selling expenses, and higher international user growth projections. Our new price estimate is still slightly below the market price. Below, we take a look at some of the trends that drove the revision of our price estimate.

We have created an interactive dashboard which outlines Snap’s expected performance for 2018. You can modify the charts (with blue dots) to arrive at your own price estimate for the company.

Snap’s Programmatic Sales Are Gaining Traction

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Snap is making progress in monetizing its platform via programmatic advertising. Although Snap’s ad prices continued to plummet over Q4 (price per ad impression declined by 25%) with the company shifting from a direct sales model to an automated auction-based model, the company is seeing volumes ramp up, allowing revenues to expand. Quarterly ARPU grew to around $1.53 this quarter, marking an increase of about 46% year-over-year. Snap also said that it increased its advertising impressions by more than four times year-over-year during the fourth quarter. We believe that Snap’s shift to programmatic ads should help the company’s bottom line, reducing its selling expenses, as programmatic ad sales have lower overheads compared to direct sales. Higher ad sales could also help gross margins.

DAU Growth

Snap added a total of 9 million daily active users over the fourth quarter, marking its strongest quarterly performance this year, with additions from outside North America coming in at close to 6 million. The recent traction in DAU adds is driven partly by its Android app, which it has been increasingly emphasizing as it looks to court users in emerging markets where smartphone penetration is growing. Separately, during Q4, Snap also launched a completely redesigned version of the Snapchat app which it intends to roll out to all its users over Q1. As the new app is simpler and is easier to use particularly for older users, it could help Snap expand beyond its core demographic of 18 to 24-year-olds.

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