Snap Had A Tough 2018, Will Next Year Be Better?

2018 has been a difficult year for Snap Inc. (NYSE:SNAP), with the stock declining by close to 60% year-to-date amid concerns about user defections from the Snapchat app after the company redesigned the Snapchat app and also due to mounting competition from Facebook’s Instagram. Below we take a look at how Snap fared over the year and what could lie ahead for the company.

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.

DAU Woes Driver By App Redesign And Instagram’s Inroads Into Core Market

The Daily Active User metric is the most closely watched number for young social media companies, and Snap has disappointed on this front this year, with its user base declining from an average of about 191 million users in Q1’18 to 188 million in Q2 and 186 million in Q3. Moreover, the decline came from across all the company’s geographic markets – namely North America, Europe and Rest of The World. While the declines are largely on account of the company’s ill-fated app redesign, which launched earlier in the year, it’s likely that the competition from Facebook’s Instagram app is hurting Snap as well. While Instagram has made significant progress in international markets, with a monthly active user base of around 1 billion, it has been increasingly targeting Snap’s core demographic, with Piper Jaffray noting that Snapchat is losing its edge among teenagers in the U.S. market.

The Big Programmatic Advertising Push

Snap has been increasingly selling ads via its self-service tools, noting that 85% of advertising revenue came from its programmatic platform as of Q3’18 compared to just 35% a year ago. While Snap previously relied on relationship-based transactions (direct sales), the shift to programmatic is allowing the company to target a wider audience, attracting smaller advertisers that it couldn’t previously reach. The shift to programmatic and continued strong user engagement (about 30 minutes per day per user)  is helping the company expand its overall ARPU, which grew by 37% year-over-year to $1.60 in Q3. Additionally, Snap has been taking steps to improve its measurement and analytics tools, and it’s possible that this could help the company court more advertisers, and in turn, drive volumes and revenues.

Snap’s Ambitions Of Profitability 

Snap also has an internal target of achieving profitability by 2019 (it noted that this was not official guidance), which could be a key catalyst for the stock in the near term. Over the third quarter, the company saw its gross margin rise to a record 36%, compared to 21% in Q3 2017 and 30% in Q2 2018, with its operating losses also trending significantly lower. However, operating losses still stood at a considerable $323 million during Q3 on revenues of $298 million, indicating that the company would likely need to scale up revenues meaningfully before it can break even.

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