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Snap - more revenue and users, losses narrow slightly

Sophie Lund-Yates, Equity Analyst | 22 October 2020 | A A A
Snap - more revenue and users, losses narrow slightly

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On 20 October Snap revealed third quarter revenue increased 52% year-on-year, to $679m, which was much better than the market expected. Growth was driven by a better than expected macro environment, including live sports, as well as stronger advertising spending from brands.

The number of daily and monthly users also rose, while average revenue per user was also much better than analysts had expected.

The higher revenue helped Snap narrow its net loss to $199.9m, compared to $227.4m last year.

Snap is not providing guidance due to ongoing uncertainty.

The shares rose 28.5% following the release.

View the latest Snap share price and how to deal

Our view

A millennial audience confined to its sofa has continued to turn to Snapchat to talk to friends. Daily active user growth has kicked up a gear, and so has average revenue per user. A more engaged audience that spends more time on the app is more attractive to the all-important advertising buyers that ultimately drive Snap's revenues.

Progress is testament to the ongoing investment in the platform. Proprietary video content and augmented reality goodies are improving the experience for users. Crucially Snap continues to invest in the backend tools that allow marketing teams to target and assess the effectiveness of their advertising dollars.

The group has also made substantial progress on profitability. While Snap's absolute net loss has only fallen by $27m, costs as a proportion of revenue have dropped precipitously. Investors should remember that this is just one quarter, and not a normal one at that. However, if the new users stick with the platform Snap has given itself a real shot in the arm that may propel long-term growth going forward.

The bull case is that, like Netflix, the group needs to invest in content and technology now to underpin a rapid move to profitability once it achieves the necessary scale. A sizeable cash pile gives it the firepower to do that, and it's a model that has worked nicely for Facebook over the years. The fact Snap's average revenue per user (ARPU) languishes at $2.73 compared to Facebook's $7.05 (Q2) lends credence to the argument - a two-and-half-fold increase in revenues on the same cost base would do wonders for profits. The group is still handing out too much stock to employees in our view, and we'd like to see that get reined in soon.

We still worry about the group's ability to sustain the current rate of growth, especially in a sector where advertisers are spoiled for choice and the likes of Facebook, Twitter and TikTok are also after a slice of the pie. With a price to sales ratio well above rival social media groups we remain cautious, though recent news has been encouraging.

Snap key facts

  • Price/Earnings ratio: 254.4
  • 10 year average Price/Earnings ratio: 182.3
  • Prospective dividend yield (next 12 months) yield: 0%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results

Daily active users increased 18% year-on-year to 249m, with the most growth coming from the Rest of World (RoW) division. Average revenue per user rose 28% to $2.73. ARPU rose 46% and 36% in North America and Europe respectively, and fell 6% in RoW.

The average number of Snaps created every day grew 25%.

Snap has continued its investment in Discover and its camera and augmented reality platforms. Users spent 50% more time watching shows and more than 40% of US Gen Z watched sports via Discover. By the end of Q3 more than 1.5m lenses had been created by users and the group has launched a suite of new Lens features.

Snap's operating margin improved from -51% to -25%, reflecting slower growth in costs relative to sales, especially marketing and general & administrative costs. This improvement was partially offset by higher interest costs, but losses narrowed nonetheless. The smaller net loss also fed into a lower free cash outflow of $70m, a $15m improvement on last year.

The group has $1.1bn in net cash, a decrease from $1.2bn at the start of the year.

Find out more about Snap shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.