Wall Street more bullish on Snap ahead of earnings

Snap Inc. (SNAP) is scheduled to report results of its fourth fiscal quarter after market close on Tuesday, February 6, with a conference call scheduled for 6 pm ET. What to watch for:

USER GROWTH AND GUIDANCE: With its last quarterly report, Snap CEO Evan Spiegel noted that the company’s revenue returned to positive growth in Q3, increasing 5% year-over-year and “flowing through to positive adjusted EBITDA as our reprioritized cost structure demonstrated the leverage in our business model.” The firm also reported Q3 daily active users, or DAUs, rose 12% year-over-year to 406M.

In terms of its Q4 outlook, Snap pointed to an internal forecast for revenue in a range of $1.32B-$1.375B. The company said: “As we enter Q4, we anticipate continued growth in our global community and, as a result, our financial forecast for Q4 is built on the assumption that DAU will reach 410 million to 412 million. We believe we are on the right path with our direct-response advertising platform and are focused on executing against our roadmap to deliver further improvements… In addition, we observed pauses in spending from a large number of primarily brand-oriented advertising campaigns immediately following the onset of the war in the Middle East, and this has been a headwind to revenue quarter-to-date. While some of these campaigns have now resumed, and the impact on our revenue has partially diminished, we continue to observe new pauses and the risk that these pauses could persist or increase in magnitude remains. Due to the unpredictable nature of war, we believe it would be imprudent to provide formal guidance for Q4. Our internal forecast assumes a revenue range of $1,320 million to $1,375 million, implying year-over-year revenue growth of approximately 2% to 6%. Within this range of revenue, we estimate that adjusted EBITDA will be between $65 million and $105 million.”

In a regulatory filing to start this week, Snap announced plans to reduce its global headcount by approximately 10% of its global full time employees. “In order to best position our business to execute on our highest priorities, and to ensure we have the capacity to invest incrementally to support our growth over time, we have made the difficult decision to restructure our team. As a result, we currently estimate that we will incur pre-tax charges in the range of $55 million to $75 million, primarily consisting of severance and related costs, and other charges, of which $45 million to $55 million are expected to be future cash expenditures. The majority of these costs are expected to be incurred during the first quarter of 2024,” Snap stated.

ANALYSTS MORE BULLISH: On the day following Snap’s last quarterly report, Citi said the company reported better than expected Q3 results with daily active users reaching 406M, revenue coming in 7% above consensus and EBITDA turning positive. However, it remains early days in Snap’s turnaround, the analyst told investors.

More recently, on December 20, Citi analyst Ronald Josey raised the firm’s price target on Snap to $18 from $11 and kept a Neutral rating on the shares. Momentum in the second half of 2023 across the broader Internet sector, and particularly across Online Advertising, eCommerce, Marketplaces, and Online Travel sub-sectors, can continue, the firm said in its 2024 Internet outlook note, adding that it believes the Internet sector is stronger than a year ago with most companies having gone through cost reductions and optimizations.

At the end of November, (PINS) on the view that both have catalysts for revenue growth upside in fiscal 2024. Snap is “the more controversial call,” where Jefferies believes the stock re-rates higher on North America revenue growth reaccelerating into the mid-teens in 2024, the analyst told investors.

A few weeks later, Wells Fargo analyst Ken Gawrelski upgraded Snap to Overweight from Equal Weight with a price target of $22, up from $8. The analyst sees advertising positively inflecting at Snap for the first time since Apple’s (AAPL) privacy initiatives in April 2021. The company’s reinvestment in its advertising tech stack, new ads management and renewed focus leads to estimates that were increased “materially above the Street,” the analyst noted. Wells believes changes made over the past several months have meaningfully narrowed Snap’s ad product gap relative to other audience platforms and views Snap’s recent product and ads leadership makeover as key to faster product innovation and revenue re-acceleration.

On December 18, Guggenheim upgraded Snap to Buy from Neutral with a price target of $23, up from $9. Guggenheim expects overall digital advertising demand will accelerate in 2024, and that Snap’s revenue growth will outperform as demand drives industry-wide ad price increases and improved relative return for Snap’s ad units, the analyst told investors. Guggenheim also expects Amazon Ads (AMZN) expanding ambitions and partnerships to bolster Snap’s advertising growth.

On January 26, Deutsche Bank upgraded Snap to Buy from Hold with a price target of $19, up from $10. The analyst sees a “clear, strong catalyst path” towards upwards revenue and EBITDA revisions for Snap, supported by Snapchat+ creating incremental revenue, the advertising platform rebuild yielding strong performance results and driving growing advertiser adoption, the Amazon partnership, which the firm says could be material given the $20B a year Amazon spends on advertising, and growing contribution from inbound advertising from China. Recent advertising checks give credence to a successful ad platform rebuild at Snap, evidenced by growing purchase related conversions, which supported a second sequential quarter of ad-spend acceleration from Q3 to Q4 and potentially a continued acceleration into Q1 of 2024, the analyst told investors. The firm says this growth profile, coupled with easier compares, “could catalyze improving sentiment.”

CAUTION FROM OPCO: Striking a more cautious tone on January 24, Oppenheimer argued that Snap shares were pricing in “overly optimistic” advertising revenue growth, “despite challenges of a sub-scale platform.” With competition continuing to increase, it will be difficult for Snap to grow share of social time spent, the analyst contends. Meanwhile, the company has not been willing to integrate third party service providers, which would deepen its advertiser bench, added Oppenheimer. The firm believes Street estimates appear aggressive going into Q4 and reiterated a Perform rating on Snap.

CURRENT EXPECTATIONS: Consensus forecasts recently called for $1.38B in revenue and 6c per share in earnings for the December-end quarter, according to data provided by Refinitiv. That EPS estimate compares to a forecast for 5c per share in earnings as of 90 days ago, data from Refinitiv shows.

SENTIMENT: Check out recent Media Buzz Sentiment on Snap as measured by TipRanks.