On Tuesday, Benchmark maintained a Hold rating on Snap Inc (NYSE:SNAP) stock in anticipation of the company's second-quarter earnings report scheduled for August 1, after the market closes. The firm highlighted several challenges that may impact Snap's ability to meet near-term consensus expectations.
The analyst from Benchmark pointed out three primary concerns. First, the expected growth in average revenue per user (ARPU) for the second half of 2025 seems unrealistic without a significant increase in the adoption of lower-funnel products, especially given that recent discussions with media buyers revealed limited progression in Snap's direct response (DR) advertising products.
Secondly, the consensus gross margin for the second half of 2025 may be overly optimistic, not fully accounting for Snap's capacity to manage infrastructure costs in the face of intense competition from larger companies with advanced machine learning and artificial intelligence initiatives.
Benchmark's gross margin estimate for 2024 is 120 basis points below consensus at 52.8%, which takes into account the guided costs for infrastructure per daily active user and content & development partner costs.
Lastly, the firm's revenue estimate for 2024 is 3% below consensus. This suggests that the current consensus may not fully consider Snap's reliance on operational expenditures to drive revenue growth in the second half of 2025. Benchmark's assessment indicates that the consensus forecasts have not adequately accounted for the operational expenses required to sustain revenue growth since 2021.
As Snap Inc prepares to release its second-quarter earnings, these observations by Benchmark underscore the hurdles the company faces in achieving consensus expectations amidst a competitive and evolving digital advertising landscape. Investors and stakeholders will be closely watching the upcoming earnings report to gauge Snap's performance and strategic direction.
In other recent news, Snap Inc has been the subject of significant developments. The company has reported a robust 21% increase in revenue year-over-year in its first-quarter 2024 results, attributed to enhancements in its advertising platform and a rise in demand for its solutions. Moreover, Snap's daily active users have reached 422 million, marking a 10% increase from the previous year.
Snap has also revealed plans to raise $650 million through a private placement of convertible senior notes due in 2030, with an additional offering of $100 million in notes subject to market conditions. The proceeds are intended for general corporate needs, potential acquisitions, and repurchasing part of existing convertible senior notes due in 2025 and 2026.
Analysts have noted the company's progress, with Morgan Stanley upgrading Snap stock from Underweight to Equalweight and increasing the price target to $16.00, reflecting an assessment of Snap's improving advertising business performance. BMO Capital Markets maintained an Outperform rating on Snap, highlighting a surge in user engagement and resilience in North America due to successful iOS platform updates.
However, Snap is also part of a broader trend of workforce reductions across North American tech firms, announcing significant job cuts. In addition, the company has expressed its support for the Kids Online Safety Act (KOSA), a proposed legislation aimed at establishing a clear "duty of care" for social media companies regarding the use of their platforms by minors.
InvestingPro Insights
As Snap Inc (NYSE:SNAP) approaches its second-quarter earnings report, Investors may find the latest InvestingPro data and tips particularly insightful. According to real-time metrics, Snap's market capitalization stands at a robust $22.0 billion, despite the company trading at a high Price/Book multiple of 10.32. This valuation is reflective of the company's substantial revenue growth, which was reported at 6.28% for the last twelve months as of Q1 2024. However, it's important to note that Snap's P/E ratio is negative, sitting at -16.68, signaling that the company has not been profitable over the last twelve months. An InvestingPro Tip highlights that analysts predict the company will turn profitable this year, which could be a pivotal moment for investors.
From a liquidity standpoint, Snap's liquid assets exceed short-term obligations, which could provide some reassurance to investors concerned about the company's financial health. Another InvestingPro Tip indicates that Snap operates with a moderate level of debt, which is an important factor for investors to consider when assessing the company's risk profile. With these financial nuances in mind, investors looking for deeper analysis and additional InvestingPro Tips can find them at https://www.investing.com/pro/SNAP, with a total of 7 more tips available to help make informed decisions. To access these insights, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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