Snapchat (SNAP - Free Report) is releasing earnings tomorrow after close and investors are likely in for some substantial volatility. Since their IPO in early 2017 SNAP has on average had a 20% price movement from earnings releases with 75% of those moves being to the downside. Tomorrow Snap is expected to report a loss of $0.21 per share, representing a 25% improvement from the same quarter last year, when it released March quarter results after market-close on Tuesday, April 23rd. SNAP is estimated to have revenues of $306 million for Q1 which would be a 32% improvement from Q1 2018 but a 21.5% decline from the previous quarter.
It appears that SNAP’s user base has plateaued in the last few quarters. Snapchat hit its user peak in the first quarter of 2018 with 191 million active daily users. They are expected to report daily active users of 187 million for Q1 2019.
Although active daily users have seen some decline in 2018 the revenue captured per user has grown substantially since Snapchat went public. With Q4 2018 showing 37% more revenue per user compared to the same quarter in 2017.
SNAP has had a very bumpy couple of years since they went public in March of 2017. The company hasn’t been able to monetize its platform while simultaneously growing its user base. I saw a considerable shift in Snapchat’s mobile application from an app that focuses on connecting friends to a platform that promotes companies, news sources, and famous individuals as well as being riddled with advertisements. It makes sense that they are able to gain additional revenue out of every user being exceedingly ad-centric but it appears to be at the expense of SNAP’s market share. The new platform esthetic just isn’t as appealing anymore.
They are losing market share to Facebook’s (FB - Free Report) Instagram which has been able to seamlessly integrate advertising into people’s feeds in a way that makes the advertising appear it belongs. Their advertising algorithm is tailored to every individual’s needs and wants through its endless amount of user data that Facebook has been able to accumulate over its years of operation. This is not only advantageous to the company being advertised, but it’s also to the advantage of the users who are being shown things they're actually interested in. Instagram has an estimated 500+ million active daily users and growing. They've taken the best parts of Snapchat and integrated them into their application, like “Stories” which allow users to post pictures/videos that their followers can see for only 24 hours. This feature is something that Snapchat originally pioneered.
Snapchat is going to have to make some serious changes in its platform if it wants to continue to be competitive in this space
SNAP has seen tremendous losses for its investors since its IPO, being down over 57% over the past 2 years. This is caused by an inability to turn a profit and disappointing user data. Sell-side analyst aren’t predicting a profitable year for SNAP until after 2020. They are still trading at relatively expensive multiple with a 9.83x price-to-current year sales compared to the industry average of 6.28x.
Snap has surged 108% year-to-date being able to curb some of the pessimism with positive Q4 earnings and upwardly adjusted earnings guidance. Snap is currently a Zacks Rank #1 (Strong Buy) because of the slight shift in analyst sentiment. With SNAP having rallied so much this year I would be wary about this earnings report. Key metrics to look at are daily active user growth and revenue per user. SNAP’s ability to be profitable is hinged on their ability to expand both of these metrics further.
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