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Snap Gains 2.5% Ahead of Earnings: What to Expect

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Shares of Snap Inc. (SNAP - Free Report) gained 2.5% during regular hours Monday, a day before the trendy social media firm releases its latest quarterly earnings report. Although Snap still faces many challenges, investors displayed excitement ahead of Tuesday’s report.  

Snap shares have shed about 3% over the past year, but have been as deep as 15% in the red as the company continues to struggle with revenue diversification. Snap’s main source of cash is from advertising on its “Snapchat” messaging platform, which enjoys popularity among teen and millennial users. However, Snap has seen a continuous decline in price per ad impression due to competition from Facebook (FB - Free Report) , Apple (AAPL - Free Report) , Twitter (TWTR - Free Report) , and Alphabet (GOOGL - Free Report) , among others.

Snap launched a new hardware product, Spectacles, in an attempt to create a new catalyst for revenue growth. However, the product has been largely unsuccessful and instead dug the company into an even deeper cash deficit. While Snap’s sales have increased on a quarterly basis, losses are ballooning, and anchoring investor optimism in the process.   

A solid earnings report could be the beginning of a much-needed momentum boost for the young company. But what should we expect from its soon-to-be-reported quarter? Let’s take a closer look.

Earnings Outlook

Snap will release its Q2 fiscal 2018 results after the market closes on Tuesday. Here’s what analysts are expecting, according to our Zacks Consensus Estimates:

Earnings: SNAP is projected to report a loss of $0.17 per share, which would represent a 6.3% decline from the year-ago period.

Estimate Revisions: The firm has seen negative estimate revisions across the board for the current quarter, next quarter, and current fiscal year. Two analysts have issued negative projections in the last month, with one coming in just the last week. But while recent estimates represent operational stagnation, they are higher than previous projections, and have brought this quarter’s consensus estimate up a cent.

Revenue: Consensus estimates have SNAP’s Q2 revenue pegged at $251.71 million. This would mark growth of 38.6% year-over-year.

Valuation

SNAP is trading at -26.9x forward 12-month earnings heading into today’s report. This represents significant underperformance compared to the broader “Computer and Technology” industry’s average of about 19.9x, and is a function of the firm’s current lack of profitability.

In the past year, SNAP has traded as high as -4.8x and currently sits at its lowest point over the same period. Its 52-week median earnings multiple is -12.6x.

Bottom Line

Snap has continued to struggle as the battle for social media dominance heats up. An unpopular app redesign coupled with lack of product diversity hurt the company at the beginning of the year. However, a recently announced partnership with Amazon (AMZN - Free Report) along with solid investments in original content development has helped Snap regain some lost ground in recent months.

SNAP shares not performed particularly well in the past year, so many investors may be more interested in sitting this one out and watching for any exciting news. Analyst revision activity for the quarter has been negative, and SNAP has a Zacks Earnings ESP (Expected Surprise Prediction) of -1.85%.

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.

Given the stock’s current Zacks Rank of #4 (Sell), this Earnings ESP value doesn’t leave us particularly confident about Snap’s chances at beating estimates going into Tuesday afternoon’s report. Regardless, Snap’s position as the most preferred social networking medium among teenagers remains a positive for future growth prospects.

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