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Snap Ad Prices Are Plunging

This may not exactly be a new development for Snap (NYSE: SNAP) investors, but it's one they should be keeping a close eye on. Pricing for Snap ads has been under pressure for a while now, ever since the company has been aggressively shifting toward programmatic ad auctions -- which is key to scaling -- instead of a human sales force. The general trade-off with such a move is that ad pricing falls while ad impressions rise, with the advertising company hoping that the extra volume will make up for lower prices.

On Snap's first-quarter earnings call last month, CFO Drew Vollero (who recently announced his resignation) noted:

First, Snap ad impressions, excluding Story ads, were up over 450% year-over-year and over 50% sequentially. Second, overall Snap ad pricing, excluding Story ads, was down nearly 65% year-over-year and nearly 20% sequentially. Third, we ended the quarter with 95% of our Snap ad impressions, excluding Story ads, served programmatically, up from 90% in the prior quarter.

Not enough bidders

Ad Age reports today on some fresh details regarding the shift in Snap ad pricing. Snap ad pricing used to be extremely expensive, with the company charging anywhere from $300,000 to $500,000 for Sponsored Lenses, the augmented reality (AR) video filters that users can apply to selfies. As Sponsored Lenses begin transitioning to the self-serve ad platform, prices have been roughly cut in half in some cases, according to the report. Snap ad pricing is now much cheaper than competing social media platforms, most notably Facebook (NASDAQ: FB) and its Instagram service.

Snapchat logo
Snapchat logo

Image source: Snap.

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Ad auctions are good if there are a lot of advertisers all placing competing bids for limited ad inventory, but the risk for Snap is that a relatively lower number of advertisers bidding can result in low prices. Facebook is the largest social media platform in the world, for better and for worse, and on the November earnings call COO Sheryl Sandberg announced that Facebook now has over 6 million active advertisers, with Instagram surpassing 2 million advertisers. Many of those advertisers are small and medium-sized businesses, Sandberg said.

Snap does not disclose how many advertisers it has on its platform, but ad analytics company MediaRadar estimated in February that a mere 400 brands bought video ads in Snapchat's Discover section in the preceding three months. That's just one of many ad formats that Snap offers, but the third-party data point still illustrates how far Snap needs to go to grow its overall advertiser base.

Snap's ad revenue growth has been a source of disappointment for investors. Not only is the company trying to navigate the transition to programmatic purchases, but the recent redesign of Snapchat hurt results "by disrupting user behavior and creating some apprehension among our advertising partners," CEO Evan Spiegel conceded. Ad Age notes that many advertiser customers are enjoying the low prices, but that's not good for Snap's top line.

With Snap shares trading at over 18 times sales, a significant premium compared to its peers, investors may still be expecting too much.

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Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.