Snap (NYSE:SNAP) is expected to report earnings on Tuesday -- the same day Twitter reports earnings. The business narrative around the company has improved, and analysts have been quick to raise price targets in response to stock price momentum. The stock has rallied by 115% year-to-date, so some analysts have raised price targets, but some question the current valuation, as a lot of upside seems to have been priced into the stock already.
Consensus expectations for Snap revenue and EPS for Q1 are $306.48 million and -$0.12 EPS. While the company still isn’t profitable, the financial losses have narrowed while revenue continues to grow at a 30% growth rate. Snap disclosed that the bulk of the revenue growth is coming from ARPU (average revenue per user) growth, as user growth flatlined in 2018. Snap likely will generate meaningful revenue growth as a result of optimizing pricing and inventory within its self-serve platform, so they do have room to improve per user revenue metrics, but what would really excite investors would be some growth in terms of daily active users, which has remained flat at 186 million for the past year.
Some growth in users or adoption would diminish the thesis that Snapchat users are churning out of the platform in favor of Instagram. Though, in a lot of cases, people use multiple social apps so there’s definitely room for a number of social apps to co-exist together, and because Snap’s social features are optimized around the camera like Instagram, it’s easy to confuse whether the two demographics completely overlap leading to a take-all environment. Therefore, to debunk some of the narrative, what would really make Q1’19 results standout would be a surprise on user metrics, as it seems fairly likely that financial estimates will likely meet or beat expectations as the consensus estimates are based on the high-end of management’s outlook for the quarter.
The analyst noted, "We remain convinced that the Snap story is similar to TWTR in 2017 whereby the turn-around should materialize into meaningful market cap appreciation as investors see a path towards growing the user base and getting back to innovation following a rough 2018. The move from $5 to $12 has priced in a good amount of our optimism around this thesis, but we still see upside from current levels. Expectations are now running high into 1Q, but we think the company continues to deliver. Our checks continue to point to healthy demand for SNAP ads in 1Q, but the company is coming off a big budget flush in 4Q and is lapping the 9-point benefit from the Olympics, so we aren't expecting much upside."
Granted, not everyone is as enthusiastic about SNAP as Sandler. For example, Michael Pachter from Wedbush downgraded the stock from outperform to Neutral while still maintaining a price target of $12.25. (To view Pachter's stock-pick performance, click here)
Pachter opined, "We are downgrading shares of Snap to NEUTRAL and maintaining our $12.25 PT. Since we upgraded shares of Snap on September 11, the stock has appreciated roughly 19%. Our price target is based upon a roughly 8x multiple applied to our FY:20 revenue estimate of $2.06 billion, and with shares now trading at roughly 8x the consensus FY:20 revenue estimate, we see limited upside from current levels."
Also, Brian Nowak from Morgan Stanley remains bearish on the stock, but did raise his price target from $5.50 to $8.50: "We raise our forward estimates and DCF-based price target to $8.50. That said, given we still have ~30% downside and our peer-based EV/revenue to revenue growth regression implies SNAP should trade at $8/share, we likely need even stronger fundamental results (than our new numbers) to drive material outperformance from here. As such we remain Underweight."
The big driver to sentiment is whether or not Snapchat can turnaround user metrics and get them to grow, especially on Android. The expectations embedded into a lot of financial models imply that Snap would need to grow at a quicker pace than it currently is, and to do so, the user narrative will need to improve. With the stock having already priced-in gains, some analysts are simply revising their recommendation lower or moving around targets, but sentiment is a little more polarizing heading into Q1’19 earnings for Snap.