Can Snap Turn Things Around Quickly Enough After A Mixed Q3?

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Snap Inc. (NYSE:SNAP) published a mixed set of Q3 2018 results last week, beating market expectations on earnings as the company improved monetization of its existing user base, although it lost 2 million daily active users compared with the previous quarter, marking its second consecutive quarter of user declines. The stock declined by about 10% in Friday’s trading. In this note, we take a brief look at the results and what it could mean for Snap going forward.

We have created an interactive dashboard analysis on what to expect from Snap in 2018. Users can modify any of our forecasts and drivers to arrive at their own valuation estimates for the company. The Trefis price estimate for Snap stands at $10, which is significantly ahead of the current market price.

Snap’s DAUs Continue To Trend Lower

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The Daily Active User metric is perhaps the most closely watched metric for young social media companies, and Snap disappointed on this front, indicating that the number declined from an average of 188 million daily active users in Q2 to 186 million in Q3. While the company noted that the decline was primarily due to problems with the Snapchat Android application, it’s possible that there were declines on the iOS side as well. For instance, the company saw its user base in the North American market – which is skewed towards iOS – decline by about 1 million users. However, the company is looking to return to growth, noting that it was developing a completely new Android app, which will be more lightweight and offer better performance. As Android has a vastly larger user base overseas, particularly in emerging markets, Snap is hoping that the app opens doors to greater global growth. However, we believe that the company could face an uphill task,  as Facebook’s Instagram is much better entrenched in these markets. Instagram is challenging Snap in North America as well, with Piper Jaffray noting that Snapchat is losing its edge among teenagers in the U.S. market.

Monetization Continues To Gather Momentum

Snap made good progress with its monetization over the quarter, indicating that its overall ARPU grew by 37% year-over-year and 14% sequentially to $1.60. The increase was driven by continued strong engagement on the app (over 30 minutes per day on average) and improving performance of the company’s programmatic advertising. Snap indicated that more than 85% of advertising revenue on Snapchat was transacted via self-service tools, up from just 35% a year ago. While Snap has previously largely relied on relationship-based transactions (direct sales), programmatic is allowing the company to target a wider audience, catering to smaller advertisers it couldn’t previously reach. Snap’s recent moves to improve its measurement and analytics tools could also help it court more advertisers, and in turn, drive volumes and revenues. Snap is likely to see relatively healthy growth over the holiday quarter, guiding for revenues of between $355 million and $380 million. Snap also has an internal target of achieving profitability by 2019 (it noted that this was not official guidance) and we believe that this could be a key catalyst for the stock.

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