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Stock Analyst Update

Snap Reports Mixed Q3, Provides Disappointing Guidance

We're lowering the firm's fair value estimate.

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Snap (SNAP) posted mixed third-quarter results as it slightly missed on the top line but beat the bottom-line FactSet consensus estimates. While user growth came in better than expected, user monetization was disappointing.  We believe advertisers displayed hesitancy in purchasing ads due to uncertainty surrounding ad performance measurement brought on by Apple’s (AAPL) changes as well as some experiencing supply and labor shortages. We think Snap, its peers, ad agencies, and ad-techs will address the Apple issue. While timing of solutions regarding supply chain issues remains uncertain, based on Morningstar’s economic projections we are assuming that the macro environment will return to normalcy for Snap and advertisers.

While we reduced our 2021 estimates, our projections remain above the firm’s disappointing fourth quarter guidance, as we expect advertisers to more quickly test and use Snap’s latest ad performance measurement tools, which more effectively utilize the firm’s first-party data. In addition, we think advertisers facing supply and labor shortages could shift their ad dollars a bit more toward brand advertising during the holiday season, which will benefit Snap. The adjustments to our projections resulted in a $70 fair value estimate of Snap, down from $74. While the stock traded down 22% in after-hours, it remains in 3-star territory. In the social media space, we continue to prefer Facebook (FB), for which our fair value estimate represents an attractive 25% upside.

Snap total revenue increased 57% year over year to $1.07 billion as daily active users increased 23% to 306 million. Monthly per-user monetization increased 28% to $3.49, compared with last quarter’s 75% growth as Apple’s policies have forced some advertisers to delay spending on direct response campaigns. User and user monetization growth of 7% and 49% pushed U.S. revenue up 60%. Revenue in Europe and other markets increased 49% and 53%, driven by 11% and 49% user growth and 34% and 3% increases in ARPUs.

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Ali Mogharabi has a position in the following securities mentioned above: AAPL. Find out about Morningstar’s editorial policies.