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Snap (SNAP) Up 11.3% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Snap (SNAP - Free Report) . Shares have added about 11.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Snap due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

SNAP Q3 Earnings Beat Estimates, User Growth Aids Top Line

Snap reported third-quarter 2020 earnings of a penny per share in contrast to the Zacks Consensus Estimate of a loss of 6 cents and the year-ago quarter’s loss of 4 cents.

Revenues jumped 52.1% from the year-ago quarter to $678.7 million, beating the consensus mark by 22.7%.

Daily active users (DAU) at the end of the reported quarter were 249 million. Snap added 39 million DAU on a year-over-year basis and 11 million, sequentially. This growth was broad based with year-over-year and sequential growth in both iOS and Android platforms.

Geographically, revenues from North America (72.6% of revenues) soared 56% year over year to $492.9 million. Revenues from Europe (15.1%) jumped 49.5% to $102.5 million. Rest of the World (ROW) revenues were $83.3 million, up 35.1% year over year.

Average revenue per user (ARPU) increased 28.8% year over year to $2.73. On a year-over-year basis, North America and Europe ARPUs increased 46.4% and 36.2%, respectively while ROW declined 5.9%.

Snap’s third-quarter 2020 top-line growth benefited from increasing ARPU and user base growth.

User Engagement Improves in Q3

North America DAU remained flat sequentially at 90 million, up 6 million year over year. Europe DAU was 72 million, which increased 7 million on a year-over-year basis and 1 million on a sequential basis. ROW DAU was 87 million at the end of the reported quarter, up 26 million year over year and 10 million sequentially.

Snap is benefiting from improved user engagement. Notably, total daily time spent by Snapchatters watching Shows increased by over 50% year over year in the quarter under review.

Over 50 million Snapchatters watch content derived from TV on Snapchat each month on average, and this familiar programming has helped drive an 80% year-over-year increase in the average number of people watching Shows every day over the age of 35.

Meanwhile, the daily average number of Snapchatters in India watching Discover content increased by nearly 50% sequentially in the third quarter. Moreover, SportsCenter viewership on Snapchat increased by 80% from July to September.

The company’s VS The World docuseries franchise launched its second season, featuring Conor McGregor, and reached over 14 million viewers.  

During the quarter, Snap partnered with Champs Sports, Clearly, Essie, Hoka One One, Kohl’s, Levi’s, Jordan Brand, and Sally Hansen to launch augmented reality-powered virtual try-on experiences.

Additionally, the company launched unscripted series including The Solution Committee starring Jaden Smith and Coach Kev in which Kevin Hart inspires Snapchatters to live their best lives through bursts of inspiration, positivity, and wisdom.

Snap added 2D body tracking technology in Lens Studio, allowing Lens creators to make AR experiences for the full human body. Moreover, the company released Lens Favorites, a new feature that allows Snapchatters to pin their favorite Lenses for future use to Android users.

As of the end of third-quarter 2020, over 1.5 million Lenses were created by the Snapchat community through Lens Studio. Markedly, the Raise Your Voice Lens generated over 70 million impressions and over 48,000 hours of playtime in the reported quarter.

Further, Snap launched its first Local Lens experience called City Painter, allowing Snapchatters to virtually paint the shared digital space on Carnaby Street in London.

In addition to AR and content, Snap is also building new ways to empower creators, developers, brands, and others to improve the entire Snapchat experience.

The company partnered with TurboVote to launch a Snap Mini to help Gen Z and millennial audience register for the upcoming presidential election. Over 1 million U.S. users have signed up for the Mini, where they can get help with registration to vote. According to Democracy Works, more than 50% are likely first-time voters.

Snap’s Gen-Z Reach Drives Ad Growth

Snap is helping advertisers reach millennials and Gen Z audience who are more active on immersive mobile platforms like Snapchat. This popularity provides the company with a competitive edge over the likes of Facebook, Alphabet owned Google and Twitter in attracting ad dollars.

In the United States, Snapchat platform reaches 90% of 13-24 year olds and 75% of 13-34 year olds. Snap is also growing rapidly in other international markets, such as India.

Furthermore, in markets like France and the UK, young people turn to Discover as their destination for premium mobile content, with more than two thirds of the Gen Z and millennial population in both markets watching premium content on Discover.

During the quarter, Snap launched ‘Meet the Snapchat Generation,’ its first-ever global business-to-business marketing campaign, highlighting Snapchat’s unique audience alongside Platform Burst, which allows advertisers to purchase ad inventory across different formats to reach a significant portion of their target audience over a few days.

Moreover, the company launched Snap Select gaming bundle, which is the first commercial bundle tailored to a specific category and has led to impactful partnerships with advertisers.

Operating Details

In the quarter under review, the cost of revenues on a non-GAAP basis increased 31.3% year over year to $285 million. Infrastructure costs, revenue sharing costs and other expenses increased 19.2%, 66.7% and 38.5%, respectively, on a year-over-year basis.

Infrastructure costs per DAU in the reported quarter were 70 cents.

Gross margin on a non-GAAP basis expanded to 58% from 51% in the year-ago quarter.

Operating expenses were $337 million, up 24.4% year over year. Sales and marketing expenses increased 15.6% year over year to $111 million while general and administrative expenses increased 9.6% year over year to $91 million. Research and development expenses rose 46.7% year over year to $135 million

Adjusted EBITDA was $56.4 million  against a loss of $42.4 million in the year-ago quarter.

Balance Sheet and Cash Flow

As of Sep 30, 2020, cash and cash equivalents and marketable securities were $2.72 billion, compared with 2.8 billion as on Jun 30, 2020.

Net cash used in operating activities was $54.8 million compared with $76.1 million used in the year-ago quarter and $66 million cash used in the previous quarter.

Free cash outflow was $69.5 million compared with $84 million reported in the year-ago quarter and $82 million in the previous quarter.

Guidance

Given the uncertainties related to the coronavirus pandemic, Snap did not provide its fourth-quarter guidance for revenues and adjusted EBITDA.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 25.56% due to these changes.

VGM Scores

At this time, Snap has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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