Morningstar | Snap Reports Impressive 2Q Results on All Fronts; Raising FVE to $15; Shares Fairly Valued. See Updated Analyst Note from 23 Jul 2019
Snap’s latest features and its Android version enhancement attracted users in the second quarter, which along with higher monetization, drove total revenue past consensus expectations. In addition, a narrower net loss displayed the firm’s progress toward full-year GAAP profitability. While Snap’s augmented reality offerings will continue to bring more users onboard in the near-term, we believe the presence of Instagram will continue to pressure no-moat Snap’s user growth in the long-run. However, we also remain convinced that Snap’s user monetization will strengthen as the firm continues to attract more ad dollars. With a stellar second quarter and management’s third-quarter outlook, which was above our internal projections, we have increased our estimates, resulting in a 7% higher fair value estimate, or $15 per share. The stock is up 9% in after-hours trading and remains in 3-star territory. We recommend waiting for a sizable pullback before investing in this very high uncertainty name.Total revenue came in at $388 million, up 48% from last year, driven by strength in user growth and monetization across all regions. Daily average users, or DAU, were up 7% sequentially and 8% year over year. Those 203 million users were also monetized very effectively as Snap’s average revenue per user jumped 36% from last year. Snap’s operating loss declined to $305 million in the quarter, from $358 million last year and $316 in first quarter, helped by significant improvement in gross margin plus management’s effective overall cost control.
While user growth was impressive during the quarter, we don’t think acceleration in user growth is sustainable over the long run. In the near term, we expect Snap DAU growth and increased user engagement to continue mostly due to the improvement in the firm’s Android-based app. Plus, innovative augmented reality features such as Lenses, likely will push user engagement higher, which will also increase not only user created content but also premium content on Discover. All of this is likely to keep attracting more advertisers and their ad dollars to the platform, as displayed by the second-quarter results. However, we still do not believe such differentiation is sustainable as Snap goes head-to-head against wide-moat Facebook and its Instagram, and narrow-moat Pinterest. Snap’s innovation, which we think continues to be impressive, can be copied by Instagram or other Facebook platforms. Similar innovative features can also be included in apps by other third parties. An example of the latest is FaceApp, which has augmented reality features like Snap’s gender filter that was introduced in mid-May.
We do think user monetization will grow at a higher rate than user count during the next five years, which will drive our projected 34% five-year revenue CAGR. Increases in content (including e-commerce and gaming content) and higher user engagement will keep pushing the demand among ad buyers higher. We also believe Snap’s self-service and automated ad buying option, plus its various format and measurement tools for advertisers will continue to attract ad dollars. Snap’s latest offer for advertisers, Snap Select which helps identify and sell ad inventory within the premium video content on Discover, will also driver further user and content monetization. In addition, we continue to expect that Snap’s option to create and integrate AR ads will attract advertisers.
Snap is a camera company. The company's primary product, Snapchat, is a camera application that helps people to communicate visually through short videos and images called Snaps. The company's products are: Camera, which includes tools for people to personalize their Snaps; Chat, which includes interacting with friends on Snapchat; Discover, which includes providing Stories and Shows from publishers, creators, and the community; Snap Map, which shows a live map of the user's location; Memories, which enables users to save the Snaps they create in a personal collection called Memories; and Spectacles, which includes creating Memories by using Spectacles, which are the company's sunglasses that make Snaps.
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