Snapchat. Time to buy or time to fly? Here’s why

Key Points

• Snap Q3 2023 daily active users (DAUs) grew 12% YoY to 406 million, up 43 million.
• Snap+ paid subscriptions rose 60% to five million members with a $100 million annualized run rate.
• Its third-quarter 2023 non-GAAP EPS was 2 cents, beating analyst estimates by 26 cents, but the net loss was $368 million, consisting mostly of stock-based compensation.

Social media platform Snap Inc. NYSE: SNAP had a mixed bag of results for its third quarter of 2023, but it's apparent that North America has become a mature market while Europe and the rest of the world (ROW) are the real growth engines. Integrating artificial intelligence (AI) technology into the platform with new products like My AI is improving its penetration. It generated over 20 billion messages between 200 million people, making it the most used AI chatbot today.

Over 250 million users experience augmented reality (AR) experiences on its platform daily. Spotlight's total time spent watching grew 200% YoY. Snap+ subscriptions grew 60% in the quarter to five million members and hit a $100 million annualized run rate.  

Social media advertising spending stabilization

Social media platforms generate the majority of revenues from digital ad spending. An uptick in digital advertising has been echoed across social media platforms. In its Q3 2023 earnings report, Alphabet Inc. NASDAQ: GOOGL YouTube generated $8 billion, up 12% in ad revenues. Google experienced an 11% YoY uptick in overall advertising revenues.

Meta Platforms Inc. NASDAQ: META reported a 31% increase in ad impressions across all its platforms but a 6% drop in average price per ad. Meta also indicated e-commerce and gaming are seeing robust ad spend, but early signs in Q4 have indicated overall softness correlating with the start of the Israel and Hamas war.

Top and Bottom Line Beat

Snap reported its Q3 2023 earnings report on Oct. 24, 2023. Its non-GAAP earnings-per-share (EPS) went positive to 2 cents, beating analyst estimates for a loss of 24 cents by 25 cents. However, its GAAP net loss was $368 million or down 23 cents per share. Stock-based compensation comprised the bulk of the net loss at $335.8 million. The board announced a stock buyback program of up to $500 million of its Class A common shares.

Revenues climbed 5.3% to $1.19 billion, beating the $1.11 billion consensus analyst estimates. This was attributed to the success of its direct-response ad platform and robust brand advertising. Adjusted gross margins sell to 54%, down from 61% in the year-ago quarter. Average revenue per use (ARPU) fell to $2.93 compared to $3.11 in the year-ago period. Snap ended the quarter with $3.6 billion in cash and cash equivalents.

Deciphering the numbers

North America commands most of the revenues, but growth was flat to weak. Europe and ROW continue to grow their metrics. The company saw positive revenue growth of 5% in its third quarter 2023. It also grew its daily active users (DAUs) by 12% to 406 million, up 43 million. Most of the growth was generated outside of the United States, consisting of 7% in Europe and 21% in the ROW.

North America had the slowest DAU growth at just 1% to 101 million, compared to 21% growth for ROW up to 211 million. While revenues grew 5% YoY, ROW accounted for most of the growth. ROW revenues rose 30% YoY to $202 million, while Europe rose 24% YoY to $200 million. North America saw revenues decline by 3% to $786 million. The ARPU fell by 4% to $7.82 in North America. It grew by 15% in Europe to $2.11 and 8% in ROW to 96 cents.

Internal Q4 2023 forecasts

Due to the "unpredictable nature of war," the company wouldn't provide formal guidance but has provided "internal forecasts." Snap expects DAU to grow from 410 million to 412 million users. Revenues are expected to range between $1.32 billion to $1.375 billion in Q4 2023 or a 2% to 6% YoY revenue growth. Adjusted EBITDA is expected to be between $65 million to $105 million. Analysts are expecting Q4 2023 revenues of $1.34 billion.

CEO Insights

Snap CEO Evan Spiegel stated that the forward visibility of advertising demand was limited due to many factors. Revenue in Q4 is historically backdated. Brand-oriented ad campaigns paused spending at the onset of the Middle East conflict, but many have resumed their campaigns. Daily run rate impact has reduced significantly, but it's a headwind that can make an impact. Advertising strength is found in CPG, restaurants, travelers and e-commerce business categories.

Analyst actions

Morgan Stanley reiterated its Underweight rating with a price target of $7.00 per share. Its analyst stated that Snap is making progress, but its uncertainties and hurdles need to be overcome for it to get more positive. On Oct. 26, 2023, China Renaissance raised its rating to Hold from Sell and a $9.00 price target.

Snap analyst ratings and price targets are at MarketBeat. Snap peers and competitor stocks can be found with the MarketBeat stock screener.

 

Daily Descending Triangle   

The daily candlestick chart illustrates the descending triangle pattern. The descending trendline commenced after peaking at $13.89  on July 13, 2023. SNAP continued to sell off, making lower highs and lower lows until bottoming at $8.28 on Sept. 26, 2023. The daily relative strength index (RSI) bounced off the oversold 30-band level to form the flat-bottom horizontal lower trendline of the triangle.

The RSI bounced in a choppy fashion, triggering the daily market structure low (MSL) breakout through the $9.39 trigger but rejected the descending trendline resistance. Its Q3 2023 earnings surged SNAP up to $10.87 in an attempt to breakout of the descending triangle, but SNAP gap and crapped, sinking back under the descending trendline.