Snap is poised to experience near-term growth primarily driven by direct-response advertisements, though challenges persist as brand advertising is anticipated to significantly impact the overall growth trajectory of the social media platform. B. Riley Securities provided insight into this outlook in a recent note. The potential market for Snap's core advertising business, under the umbrella of the social media app Snapchat, is currently valued at around $800 billion.
Analysts at B. Riley forecast that global ad spend in 2024 will reach an impressive $1 trillion, with the US representing a substantial $371 billion share—a year-over-year growth rate of 10%. According to B. Riley analysts Naved Khan and Ryan Powell, the unique positioning of Snap's sizable audience enables the company to capitalize on lucrative advertising and subscription revenue opportunities, subsequently boosting profitability. Notably, Snap's direct-response advertisements, which constitute approximately two-thirds of the total ad spending on the platform, witnessed a resurgence to positive growth in the latter half of the previous year, continuing this upward trajectory with double-digit gains in the first half of 2024.
This growth is attributed to several factors, including the introduction of new advertiser tools, enhanced capabilities, and innovative ad formats. Conversely, brand advertisements, which make up the remaining one-third of total ad expenditure, have experienced relative weakness in recent periods, particularly during the second quarter, affected by a downturn in specific consumer discretionary categories. The analysts further noted that the increasing variety of competitive ad formats available on alternative social platforms, combined with the rising popularity of short-form video platforms like TikTok, YouTube Shorts, and Facebook Reels, as well as the growth of connected TV advertising, might be dampening brand ad revenue growth for Snap.
Notably, TikTok and YouTube fall under the ownership of ByteDance and Alphabet, respectively, while Facebook is part of Meta Platforms. The expansion of ad-supported streaming services like Netflix and Amazon Prime Video may also be contributing factors to the observed softness in brand ad spending growth on Snap and other platforms, as indicated by Khan and Powell. B.
Riley has initiated coverage of Snap with a neutral rating and established an $11 price target. On the trading front, Snap's shares saw a decline of 0.7% in Friday's afternoon session, reflecting a nearly 41% drop in value year-to-date. Focusing on North America, which represents Snap's largest and most lucrative market, there are indications of improved user engagement time, anticipated to translate into better monetization outcomes.
The brokerage expects that user growth and engagement will continue to ascend in Snap's markets outside of Europe and North America in the near future. Furthermore, the Snapchat+ subscription service seems to have promising potential for sustained growth moving forward. As highlighted by Khan and Powell, a notable increase in user engagement time in North America, coupled with monetization improvements from enhancements to the advertising platform, may yield optimistic surprises to their current estimates.
However, predicting the exact magnitude and timing of such movements remains a challenge..