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Should You Buy Snap Stock Ahead of Q1 Earnings?

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Shares of Snapchat parent Snap Inc. (SNAP - Free Report) closed down 3.2% on Friday in a sign that investors might be nervous about the company’s upcoming first quarter earnings report. Snap follows fellow social media firms Facebook and Twitter , which both reported strong Q1 financial results last week. So let’s take a look to see if a similar solid quarter might be in store for Snap.

Snap has seen its stock price slip more than 33% over the last year, as the company fails to live up to its pre-IPO hype. With that said, Snap could turn things around if the firm is able to impress investors this quarter by posting strong user growth or an earnings beat.

Furthermore, tech giants Amazon (AMZN - Free Report) , Microsoft (MSFT - Free Report) , and Google parent Alphabet (GOOGL - Free Report) reported their quarterly earnings results already. Therefore, the investment world will be a bit less busy this week and might pay particularly close attention to Snap when it reports its Q1 results after market close on Tuesday.

That means now is a great time to see if Snap might be worth buying ahead of earnings.

Latest Outlook

Snap’s quarterly revenues are expected to soar 62.9% to reach $243.8 million, based on our current Zacks Consensus Estimates. At the opposite end of the income statement, the company’s quarterly earnings are projected to climb. However, Snap is still expected to report an adjusted quarterly loss of $0.17 per share.

Of course, top and bottom line growth estimates are just two of the many things investors will be concerned with when Snap reports. We can also turn to our exclusive non-financial metrics consensus estimate file to help prepare.

The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.

According to these consensus estimates, Snap’s daily active user base is expected to hit 194 million. This would mark a roughly 17% climb from the year-ago period when the company reported 166 million DAUs. Snap closed the fourth quarter with 187 million DAUs, which topped our estimate by 3 million.

Earnings ESP Whispers

Investors will also want to understand what chance Snap has to surprise investors with better-than-expected earnings results. For this, we turn to our Earnings ESP figure.

Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

In contrast, a stock with a Zacks Rank #3 (Hold) or worse, coupled with a negative Earnings ESP, is one investors typically want to avoid during earnings season.

Snap is currently a Zacks Rank #3 (Hold) and sports an Earnings ESP of -7.78%. The company’s Most Accurate Estimate—the representation of the most recent analyst sentiment—calls for a loss of $0.18 per share, which is 1 cent more than our current consensus estimate. Therefore, SNAP is a stock that could fall short of our quarterly earnings estimates.

Surprise History

Snap’s earnings surprise history and the effect that these surprises have had on its share prices are two other important factors to consider ahead of the social media company’s earnings report.

Snap has reported mixed earnings results in the four quarters it has been a public company, posting two earnings beats and two misses. With that said, Snap stock has also experienced some significant price movement when it reports its quarterly financial results.  

We judge the price effect of these earnings results by comparing the closing price of the stock two days before the report and two days after the report. Snap stock has turned negative in three of these windows. However, the company saw a nearly 50% surge in its stock price during this period after it reported a 6 cent earnings surprise in the fourth quarter.

Bottom Line

Snap has clearly been a volatile stock since going public, especially around earnings. This is not uncommon for a popular young tech company. But investors should remember that Snap is a company that could fall short of earnings estimates based on our current Earnings ESP figure.

On top of that, Snap stock could take a post-earnings hit if Snapchat fails to meet its DAU user estimates.

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