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What's in the Cards for Snap Inc this Earnings Season?

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Snap, Inc. (SNAP - Free Report) is set to report second-quarter 2017 results on Aug 10. In the last reported quarter, Snap delivered a positive earnings surprise of 0.86%.

Let’s see how things are shaping up for this announcement.

Factors at Play

User growth will be the key area of focus for investors, along with revenue growth.

Snap, the parent company of social network, Snapchat, had a brilliant IPO debut this March. However, the company has failed to sustain the momentum.

Since Mar 2, the company’s shares have declined 45.3% against the industry’s gain of 9.6%. Shares are now trading at around $13, much below the company’s IPO price of $19.

Interestingly, analysts have related the slowdown in Snapchat’s user growth to the popularity of Instagram Stories, a blatant rip-off of the former’s hallmark feature.

In August last year, Facebook (FB - Free Report) added the “Stories” feature – a slideshow of photos and videos that vanishes after 24 hours – to Instagram. “Stories” proved to be a massive hit, with 200 million daily actives by Apr 2017. Moreover, in the next two months Stories added another 50 million daily actives, taking the total count to 250 million actives by June. In contrast, Snapchat’s total daily active users (DAUs) stand at a little over 166 million.

Facebook has also added the same on Messenger as well as on its main platform. Not just Stories, the company has also added a lot more features that are eerily similar to Snapchat, like augmented reality (AR) filters, hashtag stickers, and direct messaging features (enabling users to send text and disappearing photos and videos in the chat section).

According to analysts, this is a brilliant case of a copycat improvising better than the original. Facebook not only introduced Snapchat-inspired features but made it more popular than Snapchat. Snapchat’s focus on a single demography (millenials) as well as absence of a proper international expansion strategy has cost it dear, add analysts.

Snap Inc. Price and EPS Surprise

Snap Inc. Price and EPS Surprise | Snap Inc. Quote

Apart from Facebook issues, citing sources familiar with the matter, CNBC reported that advertisers are not happy with Snap as they believe that ad measurement is not satisfactory.Plus, “discoverability” is a problem, adds the report. It’s very difficult to find content on Snapchat that can render advertising completely meaningless. Also, Instagram is fast becoming celebrities’ preferred medium, which doesn’t bode well. Celebrities ensure a huge following and with Snapchat falling out of their favor, it could be detrimental to user growth.

Advertising revenues are the mainstay of Snap’s total revenue. If advertisers are actually finding Snapchat less interesting, it could dampen its revenues.

However, Snap has refuted such claims and has added that the company has over proper ad measurement products in place. It rolled out its self-service ad platform in June.Also, in order to woo advertisers, the company acquired Placed (in June), a startup specializing in measuring success of digital ad campaigns.

Moreover, Snap has added a number of new features to boost engagement and user growth in the last quarter. These include Stories in Search, 3D World Lens, Custom Stories, Snap Maps and Geofilters. In addition, to boost engagement levels over long term, the company has been focused on boosting TV-style content on its platform. In the second quarter, it inked a $100 million content deal with Time Warner Inc to create 10 shows for its platform across various genres.

It remains to be seen whether these factors help to drive user growth.

Earnings Whispers

Our proven model does not conclusively show that Snap is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Snap has an Earnings ESP of +3.45%. This is because the Most Accurate estimate is pegged at a loss of 28 cents while the Zacks Consensus Estimate stands at a loss of 29 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Snap carries a Zacks Rank #4 (Sell).

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stock to Consider

Here is a stock that, per our model, has the right combination of elements to post an earnings beat this quarter.

Alibaba Group Holding Limited (BABA - Free Report) has an Earnings ESP of +4.11% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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