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More advertisers will start to flock to Snap, analyst predicts

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Morningstar Senior Equity Analyst Ali Mogharabi joins Yahoo Finance Live to break down Twitter and Snap’s stunning Q2 earnings.

Video Transcript

ZACK GUZMAN: But first, monster beats in the digital advertising space. As I said, Snap delivering an absolute blowout quarter. The stock's 20% move higher, obviously, speaking to that. But want to highlight the numbers here that we got in Q2 for Snap, as they saw sales more than double. They hit $982.1 million. That was well above the $846.9 million average analysts had been expecting. Daily active users also jumping to 293 million for the quarter, versus expectations of 290 million. That number was 23% higher year over year, even as people get back to getting out and living their lives in the post-pandemic world.

But for more on the numbers we saw there, I want to bring on our first guest in the back half of the show. Morningstar Senior Equity Analyst, Ali Mogharabi joins us once again. And Ali, when we look at the numbers here, pretty impressive for Snap. That stock really had already been on a tear when you look back kind of since the pandemic beginning. What did you make of the numbers there and the strength they pointed to even in the third quarter, also topping what analysts were expecting?

ALI MOGHARABI: Yeah, I think a couple of things actually stood out. One is that, as you know, Snap platform had been previously well known for its capability to offer broad-based brand advertising. And I think what happened during the pandemic is it actually forced the platform to improve and actually introduce a lot of direct response or target advertising products. So what we're seeing, what we saw in Q2 is that they benefited from that.

So the mix of that broad advertising and direct or targeted advertising actually is moving towards becoming a little bit more balanced, which I think works well for these guys. So they're not only attracting big brands for advertising. But they're more likely going to attract actual local businesses, small, medium-sized businesses. So what that does is increase their inventory for advertising, and certainly, of course, drives that top line growth, which we saw in Q2. So overall, it was very impressive.

And then I just want to mention on the user side, user growth was, of course, very impressive, especially if you look at the monetization. That also speaks for the number of advertisers that they've attracted and how much spending each of those advertisers are doing, and all of that increasing. So yeah, again, overall, pretty impressive.

AKIKO FUJITA: I wonder what you make of comments we got from the company yesterday about the impact from the new iOS and the privacy features there. Not necessarily that this quarter wasn't sort of a good measure, especially because it was rolled out mid-quarter, but the fact that Snap said they had a lot more users opt in to these features than they had anticipated. Does that, to you, signal something that maybe the pressures that were likely to come from these privacy features were a bit overblown?

ALI MOGHARABI: Yeah, to a certain extent, it does. However, as you remember, the management also stated that there is a little bit of a slowdown on the advertiser's side. So advertisers are still a little bit hesitant in trying to come up with another solution for this, so for, basically, the changes that Apple is doing regarding data privacy and tracking and so forth.

So but I do think that overall, they do offset each other. And remember, a larger percentage-- not larger, but increasing percentage of their users are actually Android users. So Android, although the monetization is slightly lower, Android is going to partially offset the impact that we may see from Apple's move. So net, net, I don't think the impact would be that big or significant.

ZACK GUZMAN: Yeah, and Ali, too, I mean, from their earnings presentation, there was one chart that stood out to me, just kind of speaking to the long runway that Snap still has ahead of it. And you compare it to kind of Twitter's daily active users and their average revenue per user and how it compares also to Facebook. And, you know, it does look like they still have a long way to go on that average revenue per user, as they kind of build that out.

And Akiko and I were kind of talking about this in the first hour of the show, but it does seem like they continue to invest beyond just being a social media company, really pouring money into their AR efforts there, analytics, the purchase around kind of letting people size potential products in the retail space. I mean, how true is it that you do see that being the big piece of the growth? Or is it more on the user side? I mean, is it fair to now not just be looking at Snap as a social media company anymore?

ALI MOGHARABI: Yeah, I think that's a good point. I think actually they will benefit not only from user growth, but also from the monetization of those users. And to answer your question, you know, where does the monetization come from? Well, it comes from advertising, as it has traditionally. But it also will come from e-commerce. And the pandemic actually accelerated the adoption of purchasing more products and/or services through e-commerce. And some of the things that they're doing with AR, that actually helps them improve their capabilities.

So I think a lot more advertisers and a lot more retailers and/or providers of other goods or services are going to look at this platform, and they're going to say, you know what? With this change in consumer behavior, this is probably one of the more attractive platforms that we can use to target additional consumers. And that, of course, will drive monetization or RPUs, the Average Revenue Per User for these guys.

So, again, to answer your question, I think they're going to benefit both from user growth and also monetization in the long run. And, you know, and that's one of the reasons why the market is pricing this at a higher multiple, whether it's on the sales front, or if you look further down the road, on an EBD front-- I'm sorry-- EBITDA front-- than, let's say, compared with Twitter.

ZACK GUZMAN: Yeah, no, definitely the big stand-out move today. But appreciate you hopping on to chat that with us. Morningstar Senior Equity Analyst, Ali Mogharabi, appreciate you taking the time.