- Reports Q3 2020 results on Tuesday, Oct. 20, after the close
- Revenue expectation: $550.56
- EPS expectation: -$0.18
Snap (NYSE:SNAP) reports its third-quarter earnings today amid investors’ optimism that the operator of its photo-sharing app, Snapchat, is succeeding in its turnaround efforts and adding more users.
Snap has been one of the strongest social media stocks this year, as its turnaround gained momentum after a couple of very tough years since its IPO in 2017. What drove investors back to this once doomed name was the evidence that the company’s app redesign has started 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. With these technical changes, Snap also changed top managers, made inroads in markets beyond the U.S. and Europe. In the quarter that ended in June, the Santa Monica, California-based Snap said its daily active users grew 17% to 238 million, after similarly robust additions early this year.
Optimism for the recovery drove the shares up 111% during the past year, rebounding strongly from its December 2018 low, when it had plunged to just $5 a share. Snap traded up 2.98% Monday to close at $28.66, after hitting a record high.
Snap’s games platform and augmented reality features, which enable 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 filter that converts a man's face into a woman's and vice-versa.
Bullish Calls
Encouraged by these improvements, analysts are expecting a 23% jump in Q3 sales, while net losses are expected to narrow from a similar period a year ago. Ahead of earnings, Stifel Nicolaus analyst John Egbert has reiterated his Snap buy rating, while raising the stock price forecast from $27 to $32.
In a note on Oct. 14 Egbert wrote:
“We expect DAUs [daily active users] at the high-end of Snap’s guidance range in 3Q, supported by steady gains in North America / Europe and an inflection in the Rest of World segment.”
Egbert believes Snap should be a major beneficiary of growing demand from direct response advertisers during the holiday shopping season. And “the company’s audience growth, product innovation and long runway for above-market ad growth should fuel robust levels of growth in FY:21 and beyond.”
Snap’s improving financial and user metrics have no doubt played a big role in its stock’s outperformance this year, but the regulatory oversight that the large social media companies are facing is another big positive for the company.
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 (NASDAQ:GOOGL) Google—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.
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.
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. After this powerful rally, we don’t recommend risk-averse investors buy this stock, which has a history of wild moves after its earning reports.