23 Oct

Snap Earnings: Stock Fell Due to Mild Revenue Outlook

WRITTEN BY Sneha Nahata

Snap (SNAP) stock fell 3.29% in the after-hours trading on Tuesday even though it reported upbeat third-quarter earnings results. The stock fell due to the company’s disappointing revenue outlook, which broke investors’ confidence in the stock.

Snap’s stock price movement

On Tuesday, TechCrunch accidentally published Snap’s earnings results early, which pulled the shares down by as much as 11%. The stock bounced back after the company’s press release.

Snap stock fell 3.98% on Tuesday and closed at $14. At the closing price, Snap’s market capitalization was about $19.3 billion. The stock is trading 23.7% below its 52-week high of $18.36 and about 190.5% above its 52-week low of $4.82. So far, the stock has gained 154.1% this year.

Third-quarter earnings results

Snap posted narrower-than-expected losses in the third quarter. The loss of $0.04 per share improved compared to analysts’ expectations of a loss of $0.05 per share. The loss recovered 67% from a loss of $0.12 per share in the third quarter of 2018. We think that the improved losses in the third quarter were driven by higher revenues, better margins, and strength in daily users. Snap is also in the process of cutting down on costs to improve its profitability.

Snap’s revenues and DAUs (daily active users) beat analysts’ estimates in the reported quarter. Revenues of $446 million beat the consensus estimate of $435.1 million and rose around 50% from the third quarter of 2018. The company also delivered impressive user numbers in the third quarter. The global DAUs rose to 210 million in the third quarter—higher than analysts’ expectation of 207 million users. Snap’s average revenue per user of $2.12 also beat analysts’ estimate of $2.10.

What drove Snap’s user base?

In the third quarter, Snapchat’s DAUs grew by 7 million from the previous quarter. Analysts expected an addition of about 4 million DAUs during the quarter. In the third quarter, there was sequential growth in the user base for the third consecutive quarter. Notably, the user base remained sluggish in the second quarter, third quarter, and fourth quarter of 2018.

Snap CEO Evan Spiegal noted that the company “benefited from year-over-year growth in user activity in Q3, including growth in Snapchatters posting and viewing Stories.” Users also opened the Snapchat app 30 times per day—more than 25 times per day as of July 2018. The new reengineered Android app helped the company build a bigger user base in the Rest of World region. Around 5 million new users came from the Rest of the World in the third quarter.

Discover, Snapchat’s monetized content platform, helped add daily users. The daily time spent watching content on Discover increased 40% YoY in the third quarter. Around 100 Discover channels gained popularity and attracted 10 million viewers per month during the quarter. Snap plans to add eight new original shows on the Discover tab this fall. Discover also competes with Facebook’s (FB) Instagram IGTV. Recently, Instagram launched its “Threads” messaging app to compete with Snap’s users. Facebook had a vast user base of around 1.6 billion users worldwide at the end of the second quarter. Twitter (TWTR), which will report its third-quarter earnings on Thursday, had about 139 million global daily users in the second quarter.

Snap Earnings: Stock Fell Due to Mild Revenue Outlook

Weak expectations

Looking ahead in the fourth quarter, Snap expects its revenues to grow to $540 million–$560 million. The average revenue of $550 million is 41% higher compared to the same quarter last year but weaker than the revenue growth in the third quarter. Analysts also had higher expectations and estimated revenues of $555.4 million—up around 42.5% YoY.

Analysts expect higher revenues during the holiday season due to the rising user base and the company’s efforts to grow its advertising revenues. However, according to CNBC, the company’s CFO stated that a lower week in the holiday season would dent its fourth-quarter revenues. The weaker guidance disappointed investors, which caused Snap’s prices to fall.

The company expects its daily users to increase to 214 million–215 million in the fourth quarter—around 2% higher sequentially. The rate of growth in daily users has fallen compared to previous quarters.

However, Snap expects the adjusted EBITDA to be positive in the fourth quarter. The company expects the adjusted EBITDA to breakeven and grow to $20 million.

For 2019, analysts expect the company’s revenues to grow 44% YoY—higher compared to 43.1% YoY growth in 2018. The revenue growth will likely fall to 34.8% in 2020. Meanwhile, analysts expect a loss of $0.20 per share in 2019—better than the losses of $0.47 per share in 2018. Analysts also expect the losses to significantly recover and reach a loss of $0.01 per share in 2020.

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