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Stock Analyst Update

Snap Making More of Its User Base

The firm's lackluster user growth is indicative of a network effects moat source deficiency and supports our no-moat rating.


 Snap (SNAP) reported second-quarter 2018 results above our expectations and consensus as the firm is more effectively monetizing its users, albeit with continuing difficulties in growing daily average users. While there are some indications of higher user interaction and engagement, similar to Twitter, Snap's lackluster user growth is indicative of the firm's network effects moat source deficiency and supports our no-moat rating of the company. Management's third-quarter revenue and adjusted EBITDA guidance was slightly below our internal quarterly projections. After adjusting our estimates accordingly, we are maintaining our $14 per share fair value estimate on Snap. The shares are flat in after hours and continue to trade in 3-star territory as they have recovered from the 12-month low of $10.55 in late May 2018. We recommend a wider margin of safety before investing in this no-moat and very high uncertainty name.

Snap’s total revenue grew 44% year over year to $262 million driven mainly by sales of significantly higher ad inventory which improved monetization and pushed average revenue per user, or ARPU, up 33% from last year to $1.40 during the quarter. While the daily average user, or DAU, count declined 2% sequentially, which according to management was due to a slower adoption of the app's redesign, DAUs did grow 8% year over year to 188 million. These growth rates demonstrate the difficulties faced by Snap when attempting to compete with Facebook's Instagram, which now has one billion users.

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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.