Analyst: Snap's Ad Business Will Be 'Painful' For Now, But Set For Long-Term Success

Snap Inc SNAP disappointed investors in its third-quarter report across various metrics.

Revenue of $207.9 million fell short of the $236.9 million Wall Street analysts expected, daily active users (DAUs) totaled 178 million which was short of the 181. million expected and average revenue per user (ARPU) of $1.17 fell 13 cents short.

On the other hand, Snap's management claimed it's the world's most-used camera platform with 3.5 billion snaps created each day.

The Analyst

William Blair's Ralph Schackart.

The Rating

Schackart maintains an Outperform rating on Snap's stock with no assigned price target.

The Thesis

The social media company's poor report was mostly due to a shift in programmatic ads which accounted for more than 80 percent of total impressions in the quarter, Schackart said. In addition, the number of impressions throughout the quarter rose 400 percent from a year ago and as a result a 60 percent decline in ad pricing.

While there's no doubt that Snap's ad business will continue to be "painful in the short term" there were some encouraging signs seen in the quarter, the analyst wrote. The North American segment, which accounts for 80 percent of total revenue, reached a 50 percent gross margin rate in the quarter. An unnamed but large ad buyer told the analyst that Snap is moving fast with its ad tech improvements.

Bottom line, Snap's shift towards an auction-based pricing model for ads "sets the foundation for longer-term success."

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