Trading 86% off its highs, Snap SNAP will be on many investors’ radars when it reports its Q3 earnings on October 20. SNAP will be the first social media stock to report followed by Twitter TWTR, Meta Platforms META, and Pinterest PINS. SNAP’s release will also give insight into the effects of Apple’s AAPL privacy changes which wiped out $300 billion in market value from social media platforms.
SNAP has been on a roller coaster ride over the last year after the intriguing social media stock reached a 52-week high of $78.18 last October. Fast forward a year later and the stock trades around $11 per share. Snap’s third quarter earnings report will be critical for the stock considering it lost most of its value after its last two quarterly reports.
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After a prior string of earnings beats showed the company could be profitable investors and Wall Street became very optimistic about Snap’s growth. However, SNAP’s recent earnings reports revealed the headwind most social media platforms are facing with slowing ad revenue.
Guidance & DAUs
After a second quarter earnings miss on both its top and bottom line, the company failed to offer any guidance or outlook for the current quarter. Snap’s reason for not providing guidance was that forward-looking visibility remained challenging. This led to a further selloff in the stock after Q2 earnings were drained by rising operating costs and slowing advertising revenue. Outside of a challenging economy for marketers to spend on ad revenue, SNAP revealed the slowing demand for its online ad platform was also attributed to rising competition from TikTok.
Despite not offering any guidance for the third quarter SNAP’s Daily Active Users (DAUs) were up 18% year over year during Q2 at 347 million. DAUs increased sequentially and year over year in North America, Europe, and the rest of the world.
Rising DAUs could still attract major marketers to SNAP’s online ad platform. This could start to increase its growth outlook again once economic conditions stabilize for its advertisers. SNAP’’s revenue almost all relies upon advertising revenue.
Outlook
The Zacks Consensus Estimate for SNAP’s Q3 earnings is a loss of -$0.01 per share, down from $0.17 per share in Q3 2021. Sales for Q3 are expected to be up 5% at $1.13 billion. This reflects that operating costs affected the company’s bottom line during the quarter rather than slowing ad revenue. Earnings estimates for the period have gone down from $0.03 at the beginning of the quarter but started to rise from -$0.02 30 days ago.
Year over year, SNAP earnings are expected to decline -90%, but its FY23 earnings are set to climb an impressive 486% at $0.30 per share. Solid top line growth is expected, with FY22 sales projected to climb 14% and another 15% in FY23 to $5.41 billion.
It is important to note that annual estimates for this year and FY23 are down from the beginning of the quarter as well. However, estimates have started to rise again over the last 30 days.
Investors will hope SNAP can restart its prior trend of beating earning expectations which also saw its quarterly earnings in the black. Wall Street also wants to make sure the company can offer at least some guidance for Q4 and FY23.
Performance
SNAP is down -76% year to date to underperform the S&P 500’s -22%. However, this is not a drastic distance from the Internet Software Markets -56% YTD decline. Since going public in 2017, SNAP is now down -30% to underperform the benchmark’s +48% but outperform the Internet Software Markets -48%.
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Despite SNAP’s decline over the last five years after its IPO, the stock has shown its potential which is illustrated in the prolonged higher peaks between FY19 and FY21. At current levels, investors aren’t paying as high a premium anymore for what is still the somewhat beginning stages of the company and stock.
Valuation
SNAP currently trades 34% below its IPO price and 53% lower than its first closing price of $24.48. The first day of trading illustrated investors’ enthusiasm for SNAP shares with most willing to pay a premium for the stock. Snap currently has a forward P/E of 196.2X which is much higher than the industry average of 43X.
Bottom Line
Snap currently lands a Zacks Rank #2 (Buy) in correlation with its earnings estimate revisions rising again. The stock trades well below its IPO price and could give investors a chance to get in on a stock that Wall Street was recently happy paying a premium for.
If Snap beats earnings expectations and more importantly offers some type of guidance the stock could rebound. Despite many social media platforms experiencing lower ad revenue, their advertisers should start to adapt to the current market environment. SNAP’s Internet-Software Industry is currently in the top 31% of over 250 Zacks Industries and the Average Zacks Price Target suggests 34% upside from current levels.
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