Snap’s Earnings Won’t Present A Buying Opportunity
By Haris Anwar
After disappointing earnings reports from two much-bigger rivals — Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) — it’s hard to believe that Snap will deliver a positive surprise when it reports its second-quarter earnings.
Snap (NYSE:SNAP) will issue numbers on Tuesday after the bell. On average, analysts expect the company to report a loss of 31 cents per share on revenue of about $250 million in the second quarter.
Snapchat is facing many deep-rooted problems. The biggest one is that it has failed to grow its daily active users in a meaningful way that could attract advertisers and help the company to generate enough cash flow.
In the most recent quarter, the daily active users reached 191 million, missing the 194.3 million average that analysts estimated. Revenue was $230.7 million, well below predictions for $244.3 million.
An uneven growth trajectory is expected for a new technology company, especially one that is trying to compete with a much bigger and richer rival. Facebook’s Instagram recently surpassed a billion-user mark. But the bigger problem with Snapchat is that there is no clear path to success.
No Sign Of A Turnaround
Recent efforts to redesign Snapchat were a disaster, facing scorn from general users and celebrities. It sank ad views and revenue and led to Snapchat’s user count actually shrinking in March, forcing CEO Evan Spiegel to announce a reversal of the redesign’s worst parts. In recent months, the company lost several top executives and cut 7% of its staff in a reorganization.
In its recent earnings update, Snap said revenue gains in the second-quarter will “decelerate substantially” from the first quarter. This bleak picture makes it very tough to get excited about its stock, which has never recovered since its IPO and lost more than half of its value.
User Engagement Will Be Key
Tuesday’s report should provide some insight on the company’s redesign success and whether it has been able to convince marketers to engage more substantively with its platform. Any surprise on its user engagement and revenue generation may trigger a short-term rally as expectations are already very low.
But trading around $12.75, Snap shares remain a highly speculative bet. We don’t see the company’s current efforts to improve its bottom line producing results in the short run. Looking at the bigger picture, the competition from Facebook’s Instagram app is going to be much stiffer, especially when Facebook is struggling to attract users on its main site and monetization of its other properties, including Instagram, takes center stage.
The operating environment for social media companies has deteriorated significantly after Facebook and Twitter’s earnings miss.
For Snap, snatching ad dollars from much bigger competitors that also include Alphabet (NASDAQ:GOOGL), is not an easy nut to crack. We advise investors to continue to avoid Snap stock, even if it trades down to $10 a share after another earning disappointment.
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