Earnings Preview: Snapchat Parent Snap Inc Reports Tomorrow

Snapchat parent Snap Inc. reports earnings after the market closes on Tuesday, Nov. 7. Here’s a look at what might be expected from its third-quarter report.

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Snap Inc. (SNAP), the parent company of Snapchat, reports third-quarter earnings after the market closes on Tuesday, Nov. 7. As has been in the case in the company’s other quarters since going public, analysts are likely to remain focused on user growth and monetization efforts.

In the second quarter, SNAP reported daily active users, or DAUs, increased 21% year-over-year to 173 million. On a sequential basis, that growth was slower and DAUs increased 4% from 166 million in the first quarter of 2017, according to the company. From that user base in the second quarter, SNAP reported it generated $1.05 in average revenue per user, or ARPU, an increase of 109% year-over-year and 16% quarter-over-quarter.

Several analysts and research firms have recently lowered revenue growth expectations, likely due in part to slower-than-expected user growth in recent quarters. Market research firm eMarketer expects SNAP to generate total revenue of $774.1 million this year, down from its previous estimate of $900 million. Looking ahead to 2018, eMarketer expects revenue to grow 90% year-over-year to $1.47 billion. 

Like other social media companies, SNAP started by building an audience, and then focused on monetizing its product. According to CEO Evan Spiegel on last quarter’s earnings call, the company’s efforts in that area are “progressing nicely, although we are still in the very early stages as we continue to build out our self-serve and programmatic infrastructure.”

SNAP rolled out self-serve tools for advertisers earlier in the year, and it has made a string of acquisitions in recent months to enhance its advertising offerings. Some of the recent acquisitions include data company Placed, which SNAP said was “acquired to enhance advertising effectiveness” in a filing with the U.S. Securities and Exchange Commission, and TechCrunch just reported that SNAP had acquired Metamarkets, an ad tech startup. Those acquisitions, as well as management’s ongoing monetization efforts, could be an area of focus for analysts on tomorrow’s call.

The company’s hardware division is another area analysts could focus on, although it’s a much smaller portion of the company than its advertising business. Despite calling itself “a camera company”, SNAP makes just one camera in the traditional sense, its Spectacles. In September, Bloomberg reported SNAP had shuffled leadership in its hardware division, with Mark Randall transitioning from his role of vice president of operations to take over hardware. 

Chart of Snap Inc.'s (SNAP) ytd stock performance

FIGURE 1: SNAP YTD PERFORMANCE.

Snap Inc. (SNAP) shares, charted above, are down 11.3% from their $17 IPO price, and have declined 37.62% from their debut price in March. The bottom chart shows the stock’s implied volatility over the same time period. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Snap Earnings and Options Trading Activity

When it releases results tomorrow afternoon, SNAP is expected to report an adjusted loss of $0.14 per share, down from an adjusted loss of $0.13 in the prior-year quarter, on revenue of $233 million, according to third-party consensus analyst estimates. Revenue is expected to increase 81.8% year-over-year, a drop from the 153% year-over-year increase reported in the second quarter.

SNAP is well below its post-IPO peak of $29.44, and shares have declined 37.62% since its debut. However, the stock has moved up quite a bit from its August low of $11.28, closing at $15.27 on Friday—still a bit under the $17 IPO price.

Options traders are expecting a big move around the upcoming earnings release, pricing in about a 12.5% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the November 10 expiration, calls have been active at the 15 and 16 strike prices, with a decent amount of activity at the 17 strike. On the put side, most of the trading has been at the 14 and 15 strikes. Implied volatility has been ticking up ahead of the earnings report, although it’s quite a bit lower than it was when SNAP reported in August.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Earnings season continues this week with 40 companies in the S&P 500 (SPX) slated to report. In terms of economic data, it’s a somewhat quieter week: JOLTs Job Openings for September come out on Tuesday morning, the U.S. Energy Information Administration releases crude oil inventories on Wednesday morning and the University of Michigan’s Consumer Sentiment Index comes out on Friday.

Also, Fed Chair Janet Yellen is scheduled to speak tomorrow afternoon, which could be an interesting one since it’s her first speech following President Trump’s nomination of Jay Powell to replace her in February. If you have time, don’t forget to check out today’s market update to see what else is happening. 

Good Trading,
JJ
@TDAJJKinahan

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800-454-9272

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