Snap’s “Puzzling” Earnings Results Cool Off the Stock and Raise Questions About TikTok

Snap delivered better-than-expected revenue for the latest quarter despite shrinking ad budgets from major advertisers who are struggling with the pandemic, but the social media company disappointed investors with slower-than-anticipated user growth and conservative guidance.

“Puzzling results”: Advertising demand is off to an auspicious start in the third quarter, but management made sure to temper expectations for the rest of the period. Snap experienced +32% growth through July 19th, but the company is projecting just +20% due to potentially weaker ad demand related to back to school, summer box office and major sports leagues. MoffettNathanson called the forecast “puzzling,” and added that the stock’s recent surge higher doesn’t make the risk-reward “seem that interesting.”

• Guggenheim downgrades to NEUTRAL: The firm lowered its rating from BUY to NEUTRAL, citing slow DAU growth and softer international monetization. Snap added 9 million DAUs sequentially, but this fell short of guidance for 10 million. Snap also experienced weakness in its “Rest of World” markets, which grew just 2% versus +17% for the business overall.

  • “While commentary indicated continued overall improvement from April revenue trend lows, management’s cautious tone, below consensus DAU guide and meaningfully slower monetization outside the U.S. and Europe drive near-term uncertainty for an expensive stock.” 

Frenemy relationship with TikTok: Slower than expected DAU growth and conservative revenue guidance is raising questions about the impact of TikTok’s rise. Snapchat and TikTok are competing for the screentime of the younger demographic, but the differentiation in product has allowed the two media platforms to form developer and advertising partnerships. Research from MediaRadar found that in 2019, roughly 80% of TikTok’s ad spend in the U.S. was dedicated to Snapchat. MediaRadar said TikTok was Snapchat’s biggest advertiser in 2019.

Video fuels engagement: Engagement trends on the platform continue to be a positive, with the number of users watching Shows rising 45% Y/Y. Furthermore, the number of users 35 & old engaging with Discover content jumped 40% Y/Y. In the U.S., Snap reaches more than 90% of 13- to 24-year-olds and 75%+ of 13- to 34-year-olds. 

Early innings of monetization: Snap’s average revenue per user is still just a fraction of some of its peers. RBC analyst Mark Mahaney says he believes Snap’s ARPU has a significant amount of growth opportunity and is still in the early stages.

• “We believe Snap is still in very early innings of monetization with ~60% of Twitter’s Advertising ARPU and approximately one-fifth of Facebook ’s on a Global basis. On a North American basis, the gap is even wider, with Snap monetizing at just one-third that of Twitter and 1/15 th that of Facebook.”

Snap vs. Twitter: What Snap lacks in ARPU, it makes up for in its user base. Snap has roughly 80 million daily active users in the U.S. alone, compared to Twitter’s 35 million, according to Stifel’s Q2 forecast. The firm also notes that Snap has more DAUs age 25 and older than Twitter has in total.