* Reports Q4 2019 results on Tuesday, Feb. 4, after the close
* Revenue expectation: $562.61
* EPS expectation: -$0.11
Popular social media platform operator, Snap (NYSE:SNAP) reports its fourth-quarter earnings today. Investors will be watching closely to see whether it is able to justify the 164% surge in its stock price over the past year by showing that it can sustain improvement in its user engagement metrics and sales.
The operator of its photo-sharing app, Snapchat, has been one of the most successful turnaround stories of 2019, after it started beating estimates in recent quarters. Since then, various analysts have released bullish notes on the stock, citing better user numbers and improved advertising.
What drove investors back to this once doomed name were the signs that the company’s controversial redesign of its app has begun to pay off, increasing the amount of time users spend watching premium content on Snapchat. During last year, the company also released a new version of its Android app, which also helped attract users in developing markets.
Snapchat in October reported a second consecutive quarter of relatively steady growth in the number of users, saying it expects a similar rate of gains in Q4. Revenue jumped 50% from a year earlier. In its most lucrative domestic market, Snapchat’s growth in average revenue from each user continued to show strength.
Snap’s games platform and augmented reality features, which enabled users to add graphics to their hands, feet or bodies, are among the elements that have gained significant popularity in recent months, in addition to the app’s face-distorting lenses and a gender-swap lens that converts a man's face into a woman's and vice-versa.
Share Rally
Encouraged by these improvements, analysts are expecting a 44% jump in Q4 sales and losses to narrow further to $0.11 a share from $0.19 a year ago. With these changing expectations, Snap stock also rebounded strongly from its Dec. 2018 low, when it had plunged to just $5 a share. It closed yesterday at $18.23.
Snap’s improving financial and user metrics have no doubt played a big role in its stock’s outperformance last year, but the regulatory oversight that the large social media companies are facing is another big positive for Snap.
An app with a clear and defined audience and with little room for misuse is in a much better position to withstand potential regulatory changes globally than behemoths like Facebook (NASDAQ:FB) and Alphabet's Google (NASDAQ:GOOGL) — the social media heavyweights that some politicians want to break up.
Despite this strong comeback, however, investors who bet on Snap stock at the time of its IPO in March 2017 are just recovering their losses after missing out on other money-making opportunities. The benchmark S&P 500, for example, gained about 37% during that period.
When it comes to competition, Snap will continue to have to battle against Facebook and Twitter (NYSE:TWTR), while the increasingly popular video-sharing TikTok app is another threat going forward. Snap shares plunged 7.6% on Oct. 3 after Instagram rolled out a new mobile application called “Threads,” that will allow users to stay in close contact with a small circle of people.
Bottom Line
Snap, in our view, remains a volatile stock despite some signs of stability in its earnings and user engagement metrics. Instagram, owned by much bigger rival Facebook, continues to pose an existential threat to Snap that's unlikely to go away. Due to these uncertainties, we don’t recommend risk-averse investors buy this stock.