Earnings Outlook: Snap earnings: As Facebook and Google challenges Construct, a new approach

Since Wells Fargo’s woes mount, its board may be on the firing line

August 9, 2017

Snapchat has been battered by Instagram, and now even Google could be aiming for Snap Inc.’s social platform, but the messaging company hopes a favorite Facebook tactic can help.

Snap

SNAP, -2.76%

approaches Thursday’s earnings report facing doubts that it will be able to defy Instagram’s Stories clone and flip around huge losses — doubts that pushed the stock lower than its IPO price even before the lockups expire. Snap closed Tuesday at $13.02, almost $4 down from the IPO price and over 55% beneath the peak price paid for shares since Snap went public in March.

Snap’s recovery plan includes acquisitions which have supplied an enjoyable way to share your location, paired with a fun way to use that location information to establish Snapchat’s value to advertisers. Using location data to market ads has been a favorite talking point of Facebook’s chief operating officer, Sheryl Sandberg, through the years, as Facebook’s ad revenue has exploded.

Among Snap’s few advantages on Facebook is that it’s a video native, which arouses the media over additional content for Facebook. Time Warner Inc..

TWX, -0.25%

 recently promised $100 million in articles and advertising investment to Snap, which keeps half the advertising earnings, and IPO investor NBCUniversal intends to launch the first daily news show on the program in July.

As Instagram fought Facebook’s struggle in social networking, however, YouTube’s owner will have something to say about movie dominance. Alphabet Inc.,

GOOGL, -0.16%

GOOG, -0.28%

 is trying to offer visual content like Snap’s “Discover,” tab, based on The Wall Street Journal, citing sources familiar with the matter. A pricing war in that form factor would certainly hurt Snap over Alphabet.

Chief Executive Evan Spiegel will likely try to focus on the location-based strategy when Snap reports second-quarter earnings Thursday, but he will face questions about the more recognized bullies on Snap’s block.

What to expect

Earnings: Analysts surveyed by FactSet expect Snap to report a GAAP loss per share of 30 cents. Snap did not fully report a non-GAAP amount last quarter, but analysts on average expect earnings, subtracting stock-based compensation, of 14 cents a share. The consensus on Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, is to get an adjusted loss per share of 14 cents.

Snap has only had one quarter of publicly reported earnings, and it reported a loss per share of $2.31 in the previous quarter. Part of the reason for Snap’s big miss in the first quarter was because it recognized a great deal of stock-based compensation, including a close to $1 billion award for the company’s CEO Evan Spiegel. That amount will be paid quarterly over three decades, but has been entirely realized in the first quarter.

Revenue: Analysts surveyed by FactSet expect earnings of $189.3 million, up from $149.6 million in the previous quarter. The Estimize consensus is for earnings of $189.45 million. In the previous quarter, Snap’s earnings decreased from its previous quarter tally of $165.7 million, recorded as a private company. Snap attributed that decline to seasonality.

See also: S&P and Russell indexes take a stand against Snap and limited voting rights

Stock reaction: Shares of Snap have dropped 42 percent in the past three months, while the S&P 500 index

SPX, -0.24%

has gained 3%. However, the stock has bounced back somewhat from low of less than $12 last week.

The normal FactSet score is hold with a cost target of $19.62.

What to look for: Investors will want to see signs of user growth. Facebook celebrated the first anniversary of Instagram Stories by revealing that it struggles Snapchat in one of Spiegel’s favorite metrics, time spent in the program. Snap has sold its smaller user base by praising its participation, but Facebook’s Instagram Stories alone has already far surpassed reported and that 250 million daily active users as of June.

Snap’s numbers last quarter revealed that the company has been having trouble growing overseas, as developing nations do not have the infrastructure to support Snapchat, according to Spiegel. The good news is that Snap brought in more Android users, who made up 30% of net additions last quarter, following the company worked to enhance the Snap program on that operating system.

Nomura analysts warned in June that user numbers may be slowing again this quarter, based on program download data. RBC Capital Markets analysts are forecasting additions of 7 million daily active users, compared with Snap’s inclusion of 8 million in the first quarter.

If Snap isn’t likely to grow as fast, it must make more money off the users it has. Snap’s average revenue per user dropped 14% sequentially to under a dollar past quarter, though that was still up 181% year-over-year. Progress in that metric, especially for overseas users, would help to salve any suffering from poor user development.

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