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Will the Snap share price respond to Q2’s user growth?

It has very much been a yo-yo year for the Snap share price [SNAP]. Although it is up 135.8% over the trailing 12 months to $59.58 at the close on 19 July, the Snap share price is trading 19% down from its all-time high of $73.59, which it set on 24 February.

Currently 24.3% up from its 2021 low of $47.92, which it recorded at the end of March, the Snap share price is up 20.2% year-to-date.

Although the Snap share price has outperformed the NYSE Composite, which has gained 12.7% year-to-date, the stock has been outpaced by competitor and Instagram owner Facebook [FB] as well as Twitter [TWTR]. The two tech giants are up 24.9% and 22.5% respectively since the start of 2021.

135.8%

Snap's share price rise over the trailing 12 months

  

Going into Q2 2021 earnings on 22 July, the Snap share price has fallen by around four percentage points in the last month. What can investors expect when it announces its latest earnings report on 22 July?

 

Waiting on a profit

One reason why the Snap share price has lagged behind those of other tech companies in recent months is because it has, arguably, struggled to turn revenue growth into profits. In Q1 2021, the company posted a net loss of $287m, compared with $306m a year earlier; it took the total loss over the trailing twelve months to $926m. The company hasn’t posted a quarterly profit since going public in March 2017.

That said, the three months to the end of March this year did mark the first time Snap had posted a positive free cashflow: $126m, up from a negative free cashflow of $5m in the same quarter in 2020.

Overall, the Q1 2021 earnings were relatively strong. Earnings were flat versus the analyst forecast of $0.06, according to Refinitiv. Revenue increased 66% year on year to $770m, beating the analyst forecast of $743.8m.

$770million

Snap's Q1 revenue - a 66% YoY rise

  

Growth in daily active users (DAUs) was also respectable. By the end of March, there were 280 million DAUs worldwide, up 22% from 229 million by the end of Q1 2020. During the most recent earnings call Evan Spiegel, CEO of Snap, said that the use of the app on Android devices was now greater than on iOS devices. The Android version has long been criticised for its inferior quality and for being plagued with bugs, so this marked “a critical milestone that reflects the long-term value of the investment we made to rebuild our Android application,” said Spiegel.

According to Derek Andersen, Snap CFO, revenue is forecast to have grown between 80% and 85% year on year in Q2 2021. DAUs should reach 290 million, representing another 22% year-over-year growth on the 238 million DAUs at the end of June 2020.

The Zacks Equity Research consensus estimate is revenue of $838.21m, which would be 84.6% up on the $454.16m reported in the same quarter last year.

 

The threat of TikTok

The robust growth in both revenue and DAUs comes amid an ongoing battle with TikTok for the attention of Generation Z.

Snap signed a licensing deal with Universal Music Group (UMG) in June, a few months after TikTok had agreed a deal. Last November, Snap launched a TikTok-esque personalised feed: Spotlight.

Leo Sun, writing in The Motley Fool, argued that the UMG deal “might encourage more of its users to create more musical videos and lenses. But Snap is still clearly playing defence instead of offence against TikTok, and it's unclear if Spotlight will fare any better than other TikTok clones.”

Although it could be argued Snap’s battle with TikTok will be in vain, analysts are bullish on the Snap share price.

“As Snap’s user base starts to engage in the real world again, there will likely be an increase in Snap’s monetisable inventory just as all in-home linear impressions start to fall” - Michael Nathanson of MoffettNathanson

 

Brian Fitzgerald of Wells Fargo acknowledged that Apple’s [AAPL] new anti-tracking update could be a near-term headwind, but he’s impressed with how Snap has improved the app experience for Android users, he wrote in a note to clients seen by MarketWatch. He set the Snap share price at a target of $91, implying a 52.73% increase from its 19 July closing price.

Michael Nathanson of MoffettNathanson has given the Snap share price a target of $80, an upside of 34.7%.

“As Snap’s user base starts to engage in the real world again, there will likely be an increase in Snap’s monetisable inventory just as all in-home linear impressions start to fall,” wrote Nathanson.

The Global X Social Media ETF [SOCL], in which Snap was the third-largest holding with a 7.77% weighting (as of 20 July), has increased 8.8% in the year to date.  17.09% in the first six months of the year. The VanEck Vectors Social Sentiment ETF [BUZZ] also holds Snap, albeit with a much lower weighting of 0.95%. The fund has climbed 3.9% since its inception in March (through 19 July).

Disclaimer Past performance is not a reliable indicator of future results.

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