User Engagement, Ad Growth In Focus As Sell-Side Reacts To Snap's Q3 Earnings

Snap Inc SNAP exceeded Street estimates for third-quarter revenue, daily active users (DAUs), average revenue per user (ARPU) and earnings before interest, tax, appreciation and amortization (EBITDA).

“Importantly, we believe that Snap's platform and business have both improved dramatically over the past several quarters,” JPMorgan analysts wrote in a note.

User Engagement

User metrics seemed to prove JPMorgan’s point. Snap reported DAU growth across all reported regions and operating systems, which JPMorgan's Doug Anmuth interpreted as a sign of Snap’s competitive strength against new rival, TikTok.

Snapchat Discover, Android app improvements and localization in global markets could drive further improvement.

“Despite higher penetration rates in both the US and Europe, we believe the user base in these markets can continue to move higher as Snap's product continues to improve,” JPMorgan wrote.

Morgan Stanley's Brian Nowak said consistent DAU growth beginning in the fourth quarter is critical to the stock’s multiple.

Ad Relations

Third-quarter DAU growth corresponded with daily interaction of more than 30 minutes per user. JPMorgan noted that time was increasingly spent in the Discover channel — a critical site of monetization.

“We are encouraged by Snap's potential to attract more advertisers through self-serve, particularly more of those with always-on spending,” its analysts wrote.

Pivotal Research's Michael Levine expects Snap to sustain its turn in domestic ARPU and thereby narrow its gap behind Twitter Inc TWTR and Facebook, Inc. FB. However, Morgan Stanley suspects that, as things currently stand, DAU growth will shift to lower-monetizing areas, which leaves ad revenue and ARPU static.

“Looking ahead, we look for more ad unit/targeting innovation to continue to move SNAP into the ‘must buy and highly measurable’ category for more brand and DR advertisers,” Morgan Stanley wrote. “We are particularly encouraged by SNAP's growth in ‘always on’ advertisers throughout '19, which speaks to their improving ad product (branding and performance) and should be a tailwind to forward growth.”

Financials

JPMorgan suggested Snap is at an EBITDA inflection point, and 2020 could be its first full year of positive EBITDA. Nomura agreed and brought forward its forecast for positive EBITDA from 2021 to 2020.

Overall, analysts appear optimistic about Snap’s prospects.

“This quarter continued to affirm the turn in the business, and we suspect that the strength in the U.S. in terms of sales team and ad products will continue to lead the way,” Pivotal wrote.

Still, many analysts are unwilling to buy in just yet.

“Notwithstanding fierce competition for user mindshare and advertiser dollars, progress towards profitability, an improving user growth trajectory, strong traction among advertisers, and sustained cost control have benefitted Snap’s outlook,” Wedbush wrote. “The company’s current share price leaves limited room for upside, however.”

Nomura offered similar sentiment: “This quarter should offer comfort to those worries about cash burn, but we believe shares are fairly valued.”

The Ratings

• JPMorgan upgraded Snap to Overweight and raised its price target from $17 to $20;
• Morgan Stanley maintained an Equal-weight rating and $17 target;
• Nomura maintained a Neutral rating and raised its target from $15 to $16;
• Pivotal maintained a Buy rating and a $20.50 target; and
• Wedbush maintained a Neutral rating and raised its target from $14.75 to $15.25.

At time of publication, Snap shares traded up 0.7% at $14.10.