tiprankstipranks
Can SNAP Stock Rebound from Poor Earnings Performance?
Stock Analysis & Ideas

Can SNAP Stock Rebound from Poor Earnings Performance?

The famous social media platform Snap (SNAP) has been one of the most intriguing stocks on Wall Street. The company recently reported disappointing Q3 earnings. That’s probably putting it mildly.

SNAP stock moved violently downward since its earnings report. Prior to the earnings report, SNAP stock was trading around the $75 level. Currently, investors can pick up a share of this tech company for under $53.

We’re going to dive into the company’s earnings in a minute. However, thinking about what Snap offers relative to its peers is an activity worth doing.

Snap, formerly SnapChat, is a social media company that’s grown into a burgeoning innovation behemoth. The company has spread out into a range of technological areas other competitors have avoided. As such, this is an intriguing company to assess right now.

Additionally, Snap is a company that’s improved its operational execution in recent years. The company’s ad tech business, its growing augmented reality products, and integrated social media platform remain a big draw for long-term growth investors.

That said, from time to time, such high-growth stocks sell off. Earnings can be a make-it-or-break-it time for any company. For highly valued tech stocks like Snap, perhaps more so.

I’m neutral on Snap right now. (See Analysts’ Top Stocks on TipRanks)

Q3 Results

This past week, Snap reported its third-quarter earnings. For investors who were optimistic about what would be unveiled, unfortunately a top-line miss derailed these expectations in a big way.

Given how aggressively valued these tech companies are, even on earnings blowouts these stocks can go down. Accordingly, when a company like Snap reports top-line numbers that miss, it can be a long way down for investors.

The rapid decline in SNAP stock followed revenue that came in at $1.07 billion versus $1.1 billion as per average analyst consensus estimates.

Now, Snap did beat on the bottom line. In fact, the company more than doubled the Street’s expectation of $0.08 of earnings, reporting $0.17 of adjusted EPS.

However, this is a hyper-growth stock. Investors aren’t necessarily buying this company because it’s profitable now. They want to know this company is going to be massive one day. Each quarter is a chance to re-assess whether this thesis is true.

Now, why did Snap miss earnings? This is the big question investors may want to be asking.

The company reported that Apple’s (AAPL) iPhone privacy changes hurt Snap’s underlying advertising business. Other social media players saw similar effects. The extent to which these companies are dependent upon each other for growth is being viewed very negatively by the market.

Any time extraneous forces drive profitability for a given company lower, investors need to re-assess their models. In this case, the changes Apple made appear to be structural.

Sure, Apple could decide to flip a switch and put things back the way they were. However, if this is the new normal, investors have reason to be wary of Snap’s prospects moving forward.

Whelming User Growth, ARPU Numbers

Another key factor investors didn’t seem to like with this recent quarterly earnings report were user growth numbers, and average revenue per user (ARPU) data.

Snap did beat in terms of user growth expectations, reporting 306 million global daily active users. This is compared to Wall Street expectations of 301.8 million DAUs.

However, as mentioned, investors appear to have factored in a much bigger beat on this line item. Accordingly, there’s little mercy for any tech company that isn’t absolutely slaughtering expectations right now.

The average revenue per user (ARPU) numbers, however, were the real kicker for this stock. Snap reported ARPU of only $3.49 per user, compared to estimates of $3.67. In other words, users are growing slightly faster than expected, but the average revenue Snap is getting from these users is declining at a faster rate.

The company reported that the Apple-provided measurement solution didn’t scale as expected. In other words, advertisers weren’t able to effectively manage their advertising spend this past quarter.

Given the fact that economic pressures are putting downward pressure on advertising prices (why advertise something a company can’t sell anyway because of supply chain issues), this is a real concern for investors.

Whether this is just a single-quarter event remains to be seen. For now, investors appear to be very cautious with SNAP stock, and are willing to wait patiently on the sidelines.

Wall Street’s Take

As per TipRanks’ analyst rating consensus, SNAP is a Moderate Buy. Out of 27 analyst ratings, there are 20 Buy recommendations, six Hold recommendations, and one Sell recommendation.

The average Snap price target is $76.48. Analyst price targets range from a high of $104 per share, to a low of $60 per share. 

Bottom Line

Digital ad stocks have tended to be long-term winners. Combined with Snap’s social media market share, it appears there’s a lot to like about this stock.

However, the company’s recent earnings shed a rather dim view of how this stock may perform from here. There’s reason to be worried. It’s understandable why this stock dropped.

While SNAP stock recover from here? It’s certainly likely. However, time will tell just how quick the recovery will be. For now, it appears many investors remain content to wait patiently to see what happens.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles