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Stock Analyst Update

Snap Still Pricey As Shares Slide

We are maintaining our fair value estimate after mixed first-quarter results and think investors should continue to look elsewhere for value.

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 Snap (SNAP) kicked off its first year as a public company with mixed March quarter results as the firm’s revenue came in ahead of our expectations, but operating loss was a miss. Additionally, growth in daily average users, or DAUs, was disappointing. In our view, while Snap may be benefiting currently from a network effect among its users, we are not yet confident that the firm can effectively monetize its users on a consistent basis. Based on the first-quarter results, we slightly increased our top line projection for this year and adjusted our margin assumptions a bit lower. We are maintaining our Snap fair value estimate of $15 per share. While the stock is trading down more than 20% in after-hours, we continue to recommend a wider margin of safety before investing in this no-moat and very high uncertainty rated name.

Snap’s total revenue jumped 286% year over year to $150 million as the firm continues to attract ad dollars, which was evident in the 181% increase in average revenue per user over the prior year. User engagement time increased to over 30 minutes per day, from 25 minutes, albeit a mere 4% sequential growth in DAUs, which was flat compared with growth in the previous quarter. The firm ended the quarter with 166 million DAUs, up from 159 million and 122 million in 2016 fourth and first quarter, respectively. While Snap’s management believes that growth in user engagement is more important for advertisers, we disagree. In our view, in order to compete effectively with Facebook for the social platform ad dollars, Snap needs to demonstrate growth in both users and user engagement. In addition, while Snap user growth has not accelerated, growth in Facebook’s Instagram users has, which increases the likelihood of Instagram emerging as a substitute for Snapchat.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.