21 Oct

Why Is Snap Stock Rising ahead of Its Q3 Earnings?

WRITTEN BY Sneha Nahata

Snap (SNAP) stock is up in the trading session today. The stock had gained over 3% as of 9:46 AM ET. It fell 1.9% on October 18 and closed at $13.52. At this closing price, Snap’s market cap was about $19.2 billion. Snap stock has gained over 145% year-to-date.

Snap is riding high ahead of its third-quarter earnings results. The company is set to report its results after the closing bell on October 22.

Third-quarter expectations

The social media company expects its revenue to rise to $410 million–$435 million in the third quarter. Its average revenue expectation of $422.5 million is over 40% higher than its previous year’s third-quarter revenue.

We believe this revenue growth will come from Snap’s robust user base. Snap’s daily user base will grow to 205 million–207 million in the third quarter, as per the company’s expectations. Its third-quarter user base was also 10.8% higher than in the previous year.

Wall Street analysts expect third-quarter revenue of $434.8 million for Snap, which indicates a rise of 46.1% from the previous year’s reported figure. For 2019, its revenue growth is expected to be 43.9% YoY (year-over-year), up from 43.1% in 2018. Analysts expect its revenue growth to drop to 34.6% YoY in 2020.

Analysts also expect Snap to see EPS of -$0.05, an improvement of 55.5% YoY, in the third quarter. Its EPS could improve to -$0.20 in 2019 compared to -$0.47 in 2018. Further, its EPS could significantly improve to -$0.01 in 2020.

Snap stock’s past performance

The Internet giant reported better-than-expected revenue and earnings in the second quarter. Snap’s adjusted EPS of -$0.06 were better than analysts’ expectation of -$0.10. We believe the company’s rate of loss improved due to its upbeat revenue, average revenue per user, and better-than-expected number of daily users. Snap also expanded its gross margin by 16% to 46% in the second quarter. The company’s significant progress in cutting costs helped it boost its margins.

Snap’s revenue of $388 million was better than analysts’ expectation and was also up 48% YoY in the second quarter. Snap managed to bring its daily user base number to 203 million, topping analysts’ expectation of 192.4 million. Snap’s user base grew by 13 million in the second quarter.

User base accelerating

The company’s user base has been gaining momentum for the past two consecutive quarters. Snap’s daily users increased from 186 million in the fourth quarter of 2018 to 190 million in the first quarter of 2019 followed by 203 million in the second quarter.

Snap CEO Evan Spiegel is making efforts to grow the company’s user base. In April, the company successfully rolled out a Snapchat Android app, which is likely to have brought more users to the platform in the third quarter. The company’s Android redesign and new augmented reality lenses have resulted in improved engagements and enhanced the user experience.

We expect the company’s user base to continue to grow in the third quarter amid its recent partnership with Spotify (SPOT) and other efforts. The Spotify partnership will enable Snap users to listen to Spotify music and share it with friends. Snap has also added a new line-up of original programming called Snap Originals. The three- to five-minute original shows will target messaging app Snapchat’s mobile audience and could further boost user engagement. The addition of new features such as the Lens Studio 2.0 has also made Snapchat more attractive and could drive more users.

We believe that Snap’s Discover format will engage new users in the near term. Snap is planning to release eight new shows on the Discover format this fall. We also expect Snap’s new products, such as 3D Camera Mode and Spectacles 3, to drive user growth and accelerate revenue. Snap Games are also likely to accelerate its mobile gaming business. An Evercore analyst expects Snap to gain about $350 million in gaming revenues in the next two years.

Snap users facing competition from rivals

The company faces stiff competition from Facebook (FB) and Twitter (TWTR). Facebook had around 1.6 billion daily users worldwide as of the end of the second quarter. Twitter, on the other hand, had about 139 million global daily users in the second quarter. Facebook’s recent launch of its “Threads” messaging app could further make a dent in Snap’s user numbers. Meanwhile, Snap believes in continuing to focus on its core base of young consumers—in contrast to Facebook, whose users are generally older.

Analysts favor Snap stock

Despite the competition, analysts are confident about Snap stock in the third quarter. Many have upgraded the stock on optimism over its user base and mobile gaming business. Last week, Bank of America upgraded the stock to a “buy” rating, just ahead of its third-quarter earnings results. MKM Partners has also initiated its coverage with a “neutral” rating and a price target of $16. Other analysts, including Arete Research, MoffettNathanson, Morgan Stanley, and Susquehanna, have also upgraded Snap stock recently. Snap’s option traders are also betting on the stock.

Bullish analysts have thus put Snap’s 12-month target price at $17.61, a 30.3% premium to its price of $13.52 on October 18. Meanwhile, around 13 analysts have given it a “buy” rating out the 41 covering its stock. A total of 25 analysts have “hold” ratings on Snap. Only three analysts have given the stock “sells.”

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