Snap Bets on AR, Advertising

Snap Bets on AR, Advertising
A Coke can augmented with a Snap lens.

Direct response advertising and augmented reality are the two big focuses of Snap Inc. 

In comments to investors made during the company’s recent investors meeting, Evan Spiegel, the chief executive of the Santa Monica-based technology company and owner of Snapchat, a mobile app, said that the staff has never worked on anything as profound and meaningful as augmented reality, or AR.

“Augmented reality brings the benefits of computing into the real world, in three dimensions,” Spiegel said. “It enables us to learn and interact with computing in a natural way, while freeing us to move around and fully experience our surroundings.”

The company’s stock, however, has not reflected the upbeat attitude of Spiegel and other senior management of Snap. 

The company’s share price has increased this year by 33% through March 27, when it closed at $11.74, but that price is still well below the 52-week high of $39.34 reached on April 4 of last year. It closed at $11.06 on March 28.

The company reported adjusted net income of $215 million (14 cents a share) for the quarter ending Dec. 31, compared with adjusted net income of $360 million (22 cents) in the same period the previous year. Revenue increased by a fraction of 1% from the fourth quarter of the prior year to $1.3 billion.

James Heaney, an equity analyst with Jefferies LLC, said in a recent research note that the firm was lowering its target price of Snap shares to $9 from $10 and assumed there would be no revenue growth for this year. 

“(Fourth-quarter) results were disappointing with 0% revenue growth, in line with expectations, but Q1 revenue likely declining by a mid-single-digit % year over year. We are concerned that Snap’s issues are intensifying, as recent ad platform changes further pressure revenue growth and depth of engagement on friend stories again decreasing year over year,” Heaney wrote in the report.

Thomas Champion, a senior research analyst with Piper Sandler & Co., also has a target price of $9 on Snap shares and reiterated his firm’s neutral rating of the stock in a research note released after Snap’s February investor meetings.

“(Chief Operating Officer Jerry) Hunter talked about the near-term strategy of focusing on the DR business (2/3rds of revenue),” Champion said in the report. “Management suggested AR tools get a lot of attention and that one ecommerce company was excited about their recent trials. Management suggested taking a slower approach to monetizing Spotlight has been the right long-term decision.”

Spotlight is the company’s new entertainment platform for showcasing the best of Snapchat.

Longer term, management is focused on monetizing maps and expanding Snap+, its subscription-based mobile app, which has already reached 2.5 million users and $100 million in annualized revenue since being introduced last summer, Champion said.

“Ultimately, AR is the long-term opportunity management is most excited about,” Champion wrote in the note. 

“We believe DR is resilient because it provides the most measurable (return on investment) for advertisers, who need a high degree of confidence in their spend,” Hunter added in his comments.

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