Is a Snap share price revival still in the picture?

Last year was a bad year for Snap [SNAP]. Following investor caution around its failure to grow customer numbers, another annual loss of $166m and model Kylie Jenner suggesting that nobody used the app anymore, Snap’s share price plummeted from $20.42 at the start of February to just $4.82 in mid-December. 

But, in the start of 2019, the group began to see recovery. With new and improved tools such as augmented reality photo filters as well as, according to CNBC, a renewed focus on Generation Z and a more mature advertising offering, the share price had a resurgence, climbing back to around $18 in July.

Strong second-quarter results also helped. Snap added 13 million daily active users – to a total of 203 million for the quarter – and increased average revenue per user by 37% year on year. Overall revenues rose 48% to $388m since Q2 2018, however, costs climbed 11.7% to $693m as Snap ramped up R&D spending by 16%.

At the time Brent Thill, managing director of the internet research team at Jefferies, told the Financial Times that Snap was “becoming one of the most loved names and for the right reasons — the fundamentals are improving.”

Facebook in the foreground

In fact, the company’s share performance this year has outpaced the S&P 500 as well as rivals Facebook [FB] and Twitter [TWTR], but lately, shares have fallen back once more to sit at $13.76.

The catalyst for this was reports in August that Facebook was set to launch Threads – a camera app for Instagram users. Officially launched earlier this month it has Snapchat like features to allow users to privately share photos and videos.

This could be a huge threat to Snap given that its daily user base is dwarfed by Instagram’s 500 million.

Despite this, Morgan Stanley analyst Brian Nowak gave Snap a boost last week when he upgraded its shares to equal weight from underweight as a result of increased advertising revenue and cost efficiencies.

He also cited the potential for the company to improve its monetization, original content and average revenue per user, which is currently a fifth of what Twitter brings in and just 7% of Facebook, according to MarketWatch.

"At a high level, year-to-date we have underestimated Snap's stronger top- and bottom-line execution and ability to drive growth and upward revisions," Nowak wrote. He raised its target price to $17 from $14 but noted that to move to an outperform rating it needed to grow daily active users and “on-platform innovation”.

Analysts are also interested in Snap’s access to the key 18 to 34-year-old age group, Guggenheim’s Michael Morris upgraded to Buy, writing in a note to clients that this and “strong usage trends” should help drive growth in advertiser demand, reports found.

“At a high level, year-to-date we have underestimated Snap's stronger top- and bottom-line execution and ability to drive growth and upward revisions” - Morgan Stanley analyst Brian Nowak

What next for Snap?

Snap’s third-quarter results scheduled for October 22nd may further improve its image amongst analysts and investors.

Snap is forecasting its daily active users to grow to between 205 and 207 million users during the period – compared with 186 million users at the same time last year.

The company expects third-quarter revenues of between $410m and $435m, an increase on the $297.7m recorded in the same period last year. Earnings are expected to remain in the red at $85m to $60m.

Snap share price vitals, Yahoo Finance, 15 October 2019

But a report from Hargreaves Lansdown, although highlighting the company’s strength in attracting hard to reach millennials and Gen Z individuals for advertisers, suggests that for Snap to emulate its rival Facebook’s success, “it’ll need to prove it’s more than just a filter-filled gimmick”.

The report notes that the group is heavily investing in “quality and duration of user engagement,” pointing to success so far from original content, however, it also considers that the company’s “vast cost base means it's still some way off translating that revenue into profits and dividends”.

According to Market Realist, analysts forecast Snap’s revenues will grow by 43.7% year-on-year in 2019 and 34.3% in 2020. Earnings are tipped to climb by 57% in 2019 and 93.7% in 2020.

The consensus rating among 40 analysts according to CNN is to Hold, with 26 analysts taking this position and 12 taking a Buy position. Analysts gave an average 12-month price forecast of $18, representing a 30.8% increase.