Why Snap is a buy
$Snap Inc (SNAP.US)$ Snap reported a record 306M daily active users for the third-quarter last week, showing 23% year over year growth, and the earnings card showed record users in all territories. In Q3'21, 96M of Snap's 306M daily active users were from the U.S. and Canada, which calculates to a geographic user share of 31%. The number of users outside of North America surged to a new record of 210M in the third-quarter, 80M of which came from Europe and 130M came from other regions, loosely grouped together as the rest of the world. The geographic user shares for Europe and ROW were 26% and 42%. The fastest growth, once again, came from countries outside North America and Europe. These regions added 10M new daily active users to Snap's platform quarter over quarter.
Non-western regions and markets present the largest growth and market opportunity for Snap. While the U.S. is the most profitable market for Snap regarding advertising dollars and monetization, Snap's low penetration rate of 5% in non-western markets creates a long runway for user and revenue growth.
The third-quarter was largely a successful quarter for Snap, commercially speaking. The firm's top line surged 57% year over year due to accelerating platform and user growth. Snap's Q3'21 revenues soared to $1.07B but they fell slightly short of the firm's guidance of $1.1B. Although losses narrowed year over year, Snap, despite surging user and ARPU growth, failed to report a profit. The loss for Q3'21 was $72.0M.
After the social media submitted its earnings card, shares of Snap dropped nearly 30%.
The reasons for the steep drop were that Snap fell short of revenue expectations (including its own forecast) and submitted a weak sales forecast for the next quarter. Snap expects just $1.17B to $1.21B in revenues in Q4'21, which indicates slowing revenue growth. Snap's revenue outlook, however, still implies a minimum of 9% revenue growth, quarter over quarter…
Growing concerns about Snap's revenues are related to $Apple (AAPL.US)$ iOS 14.5 update in April. The iOS update included a feature called App Transparency Tracking which gives users the option to limit advertisers' ad tracking capabilities. For advertisers, this policy change has wide ranging implications because the opt out feature allows users to effectively limit advertisers' campaign insights. Less ad tracking means less efficient market campaigns which translates into a lower ROAS (return on ad spend) for advertisers. Another factor affecting Snap's ad business relates to the current supply chain crisis… which appears to be getting worse, not better. Advertisers are holding back on ad campaigns since it takes longer to get goods to retail stores. These issues represent short term commercial challenges for Snap.
Final thoughts
Snap's ad revenues may decline short term, but the long term trend in digital advertising indicates growing ad spend, which is set to benefit large platforms like Snap with hundreds of millions of active users. Snap is growing its user base and ARPU rapidly, which are the two most important metrics for social media companies. After Snap went through a near-30% drop in pricing, I bought Snap for the recovery potential!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
Milenko : Very informative article. That reminds me of FB when it started and was below $20 and many thought it was worthless. One day it went down 16 percent. Now its nearly 20 times gain in price. What I like on SNAP is its steady growth. Thank you.
hairless Milenko : Thank you very much for reading and commenting! I bought Snap two days ago and believe the stock will bounce back, but it may take a while.
hairless : Great article. My main concern is that you do not address or put out any thought to how the Apple changes are going to be fixed by SNAP. The selling caused by these changes is probably overdone however, being a digital advertiser myself - this data and the ability to re-target is a big deal. Not sure SNAP or any other advertiser is going to be able to quickly overcome these changes.
Kieron Morley hairless : I thought about it and even wrote a paragraph about it, but then deleted it because it was too speculative. My thought was that advertisers are pulling back temporarily to determine what happens with existing ad campaigns and then adjust. I don't expect them to scale back ad spending longer term. These apps and platforms are still very very profitable for advertisers. Digital platforms will continue to grow ad revenues rapidly in the future and I believe this will especially be the case with Snap which sees growing users and ARPUs. In the end, marketers may simple accept lower ROAS.
Kieron Morley : Buy snap hold snap and accumulate more on the dips
Their business is not over but don't see further growth coming in.. All that had to be were already priced in. So a fall is justified unless there's a radical change of until next earnings.