This week, Snap (NYSE:SNAP) will report its first earnings as a public company. These reports are always highly volatile as the market has to gauge the accuracy of analyst estimates and the quality of management forecasts not knowing historical trends.
The stock has jumped back to $22.50 despite news that Instagram Stories is stealing the thunder from Snapchat. The good numbers from Twitter (NYSE:TWTR) helped the sector stock, but many questions remain with the upcoming quarterly report.
The number that matters the most when Snap releases Q1 results on May 10 is the DAUs. As my previous research highlighted, the biggest issue when the company went public back in March was the startling slowdown in user growth.
The social platform only saw Q4 users grow sequentially to 158 million, up 5 million or 3.3% from the prior quarter. The introduction of Instagram Stories by Facebook (NASDAQ:FB) in October and the recent revelation that the copy cat version reached 200 million users were a bad sign.
As a review, Snap reported the following results for the prior quarterly periods. The massive losses combined with the slower user growth are a huge problem.
The market will love the possibility of revenue growth in the 300% range, but one will want to note that costs are likely to grow at an absolute number in excess of the revenue gains. With 1.2 billion shares outstanding used in the loss calculation, analysts are forecasting a net loss in excess of $200 million following only a $170 million loss in Q4.
The average analyst estimates further highlight the potential volatility after Q1 earnings. Analysts forecast an average loss of $0.19 per share with a high estimate of $0.06 per share and a low estimate of $0.61 per share.
Source: Yahoo Finance
The range is massive considering 1.2 billion shares outstanding. The scary part is that the average revenue estimate is only $158 million and each $0.10 per share loss amounts to $150 million. Snap quickly reports a loss double revenue estimates at those numbers.
Ultimately, the key is Q2 guidance. Analysts forecast a nearly $50 million sequential revenue increase and a rather large reduction in the forecasted EPS loss.
The $27 billion stock valuation is hard to justify even with Snap hitting the $2.06 billion revenue target in 2018. Any signs the company misses those estimates and the stock tanks fast.
The story gets scary with the signs that user growth is stalling. The average analyst estimate is for a $600 million loss this year. While Snap can definitely improve monetization, the social site needs to grow users in order to break even.
Canaccord Genuity placed the following ARPU targets per year on North American users:
- 2016 - $5.83
- 2017 - $11.02
- 2018 - $19.39
- 2019 - $28.07
The per user revenue growth is insane considering analyst Michael Graham suggests that Facebook only grew approximately 50% annually during the peak growth years.
The key investor takeaway is that Snap must show a re-acceleration in user growth following a weak Q4. Doubling the sequential DAU addition to 10 million is an absolute must for the initial trading of the stock following earnings.
Ultimately though, Snap must show to the market how the company can ever reach a profitable future with these massive expenses. Either way, expect any post-earnings rally to be short-lived.
Disclosure: I am/we are long TWTR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.