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Snap Survives Q1 Miss Through Encouraging Q2 DAU Forecast

Shares of Snap, Inc. (SNAP) had a topsy-turvy ride during yesterday’s after-hours trading session, after the company fell short of revenue and earnings expectations and yet projected higher user growth than consensus estimates.

Snap is an American camera and social media company that generates a major portion of its revenue through advertising. After ending the day down 4.4% at $29.42 on April 21, SNAP stock fell around 10% immediately following the results, but rose almost 6% on a promising user base forecast.

Year-to-date, SNAP stock has lost 36.9% amid a broader market sell-off, particularly as advertisers stopped using the portal due to the uncertain geopolitical environment.

Moreover, the company stated that macro headwinds, namely supply chain disruptions, labor shortages, inflationary pressures, and the impact of rising interest rates on the overall economic environment, continues to challenge its operations in Q2.

Notably, the company believes that the Ukraine war has resulted in companies’ cutting their advertising budgets due to the uncertainty and the overall inflationary environment.

Weak Q1 Results

Snap’s Q1 revenue leaped 38% year-over-year to $1.06 billion and mildly missed the analyst estimates of $1.07 billion.

Similarly, Snap’s adjusted loss of 2 cents per share came in weaker than the 1 cent adjusted profit estimated by analysts. The figure was even weaker than an adjusted break-even number reported in Q1FY20.

On a positive note, Snap’s Q1 daily active users (DAUs) climbed 18% year-over-year to 332 million and beat the analyst estimates of 329.7 million users. The substantial growth in DAUs was attributed to a sequential and comparative period of growth across North America, Europe, and the rest of the world.

Mixed Q2 Guidance

For the second quarter of fiscal 2022, Snap forecasts revenue growth to be between 20% and 25% of Q2FY20 revenue, continuing with the downward trend from the highs registered in 2021 and making comparable trends tougher.

On the bright side, Snap expects its Q2 DAUs to be between 343 million and 345 million, which is much better than the consensus estimate of 340 million.

Additionally, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) are projected to break even or earn $50 million in Q2.

Official Comments

Commenting on the results, SNAP CEO, Evan Spiegel, said, “Our first-quarter results reflect the underlying momentum in our business through a challenging operating environment… We remain focused on providing value for our growing community, delivering ROI for our advertising partners, and investing against our enormous opportunity in augmented reality. We’re excited to share many new products and services at our annual Snap Partner Summit next week.”

Analysts’ Take

Following Snap’s Q1 results, JMP Securities analyst Andrew Boone maintained a Buy rating on the SNAP stock but lowered the price target to $50 (almost 70% upside potential) from $65.

Boone believes “macro issues are masking the company’s progress with its ad sales, targeting, and formats.” However, he is particularly encouraged by Snap’s “Spotlight which has started to be monetized, Lenses highly differentiated and still early (250M people use AR daily), and Maps and Games/Minis representing medium-term opportunities”

“We continue to believe the company has multiple levers to reaccelerate revenue while innovation remains a core company tenet,” Boone concluded.

Overall, the SNAP stock commands a Strong Buy consensus rating based on 22 Buys versus seven Holds. The average Snap price forecast of $52.85 implies 79.6% upside potential to current levels.

Hedge Funds

Additionally, TipRanks’ Hedge Fund Trading Activity tool shows that confidence in Snap is currently Very positive, as 14 hedge funds increased their cumulative holdings of SNAP stock by 18.7 million shares in the last quarter.

Ending Thoughts

Although Snap’s reported quarter results and forecast represent sluggish growth compared to historical quarters, this may be true for most social media companies that have yet to release their Q1 results.

According to the average target price forecast for the upcoming twelve months, given the year-to-date fall of around 37%, SNAP stock still has roughly 40% upside room to grow. Moreover, with a lineup of new products and services expected in the near term, the current stock lows may suggest a good entry point for social media stock enthusiasts.

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