Snap [SNAP], parent company to social media app Snapchat, had a stellar 2019. The firm’s share price gained a massive 196% for the year. The social media company’s growth in average daily users (DAUs) and effective monetisation of these users is deemed to have kept investors happy.
This share price rally has continued into 2020. The stock has gained 9.5% up to 3 February.
However, ahead of its Q4 earnings results, which it is due to report on the 4 February, Snap’s share price is trading considerably higher than its sales – and way ahead of competitors Facebook, YouTube and Pinterest. This has some wondering if the share price is due for a correction.
What happened last quarter?
Snap’s share price dropped after Q3 earnings were reported on 22 October despite beating expectations – the share price slid 5.8% in the day proceeding the announcement. The company had surprised investors, reporting a narrower loss per share than expected of $0.04 versus $0.05, based on Refinitiv data according to CNBC. Revenue, meanwhile, was $446m compared to $435.1m forecast.
One of the company’s most important metrics, the growth of global daily active users and average revenue per user (ARPU), also surpassed expectations. The company announced 210 million DAUs, more than the 207 million forecast by FactSet. ARPU meanwhile was $2.12 per user, up on FactSet’s $2.10 expectation.
What raised concerns for investors, however, was the disappointing guidance for Q4 earnings. For the quarter, Snap said it expected revenue between $540 and $560m, a disappointment compared to Refintiv forecasted sales of $555.4m CNBC notes. This light forecast was due to there being one less week between Black Friday and the end of the holiday shopping season, a key period for Snapchat, Snap CFO Derek Anderson stated.
What to expect in Q4?
Despite this, the consensus outlook is that Snap will deliver a year-on-year increase in earnings and higher revenues for Q4. Revenues are expected to be $560.39m, up 43.8% from the same quarter last year, according to Zacks.
Analysts also foresee “sizeable growth” in daily users in Q4, along with shrinking net losses according to Alan Farley, writing in Investopedia. He also highlighted analyst’s expectations for an EPS of $0.12, narrower than the $0.16 loss in the previous quarter – this has been narrowing since Q1 in which $0.23 per share was lost.
|Operating Margin (TTM)||-67.76%|
|Quarterly Revenue Growth (YoY)||49.90%|
Snap share price vitals, Yahoo Finance, 03 February 2020
Reasons to be cautious
Despite all this positive news, some analysts are cautious. Wayne Duggan, writing for InvestorPlace, believes betting on a share price that is up over 165% in the last twelve months is unwise. The stock, he said, is more likely to fall than rise. “At the very least, I would take some profits off the table ahead of the company’s Q4 earnings.”
Part of the reason for this caution is that Snap is commanding the growth of an industry leader, but is far surpassed in both daily users and earnings by competitors such as Facebook [FB], YouTube, Twitter [TWTR] and even newcomer TikTok.
As of Q3, Snap had about 314 million active users, a figure outpaced by Facebook’s 2.4 billion users, YouTube’s two billion users, Instagram’s one billion users, Twitter’s 330 million users and TikTok’s 500 million. Snap’s ARPU (average revenue per user) of $2.12 is also dwarfed by Facebook and Twitters respective ARPUs of $7.26 and $5.68.
Snap's active users, as of Q3, versus Facebook's 2.4 billion users
Despite this, as of 24 January, Snap’s share price is trading at roughly 73.4X the average 2021 earnings estimate and 17.2X sales. This towers over the price of Facebook, which trades at 9.4X its sales, Twitter that does so at 7.6X its sales, and Pinterest, which trades at 11.6X its sales.
Many analysts remain positive on the share price, despite its in-built problems. The current consensus among 40 analysts polled by CNN is that the stock is a buy, while 33 give the stock a median target price of $20, a 5.9% increase from Snap’s 30 January close price of $18.88.
Bank of America analyst Justin Post estimates that Snap’s revenue could rise by 40% in 2020, with its ARPU increasing 26% according to InvestorPlace. The bank has a buy rating on the stock and a $22 share price target.
“Snap still has a big opportunity ahead with a growing Millennial/Gen Z user base that spends 30+ minutes per day on the app,” Post said.
“Snap still has a big opportunity ahead with a growing Millennial/Gen Z user base that spends 30+ minutes per day on the app” - Bank of America analyst Justin Post