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Snap Can't Turn Around Sluggish User Growth

Wed, 8 Nov 2017

The firm's results underscore our no-moat rating and we see shares as fully valued.

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Video Transcript

Snap reported third-quarter results below expectations as the firm's disappointing user count supports our view that Snap lacks a network effect moat source. The impact of ongoing sluggishness in user growth is apparent in revenue generated per user as that figure nudged up only slightly during the quarter.

Snap's total revenue grew 14% and 62% sequentially and year over year, respectively, to $208 million. While those growth figures seem impressive, in our view, they are disappointing for an early stage growth firm. Snap's daily active user count grew only 2% sequentially, or 16% year over year, as the difficulties that Snap faces when competing against Facebook become more apparent. In addition, the firm's average revenue per user grew only 39% year over year, significantly lower than the 110% growth we saw in the second quarter and indicative of lower prices paid by advertisers per Snap ad impression or inventory.

With what appears to be increasing difficulty faced by management to accelerate user growth combined with lower ad prices, we further lowered our top- and bottom-line projections for Snap. Our updated model now yields a $14 per share fair value estimate, lower than our previous $16. Although the stock is trading down around 15%, we recommend a wider margin of safety before allocating capital to this no-moat and very high uncertainty name.

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