Snap Earnings Weren’t So Bad — Why the Stock Could Be a Buy

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Snap could just be a buy, as its stock falls hard after an earnings report that investors hate but analysts see as largely encouraging.

The stock fell 9.11% to $17.26 a share Wednesday, after Tuesday afternoon’s earnings release. Before we dive in, here were the key results:

Revenue was $561 million, missing estimates of $563 million. Loss per share was 17 cents, wider than estimates of 12 cents. Daily active user count rose 17% year-over-year to 218 million, beating estimates of 214 million.

Strong engagement trends, resulting from new products, moved average revenue per user up 23% to $2.58, still missing estimates of $2.61. This looks to have offset the positive revenue impact of the DAU beat.

The stock had risen 12% for the year into the print and the losses were wider than expected, making investors uneasy.

But “We think Snap was materially impacted by the shortened holiday season,” wrote RBC Capital Markets analyst Mark Mahaney in a note.

“As a smaller platform, with few supply constraints (much more inventory than advertisers), a reduction in advertiser demand has a bigger impact on Snap’s head/premium inventory versus Google and Facebook,” Mahaney said.

In short, the shortened holiday season meant less ad demand, so with supply remaining the same, ad prices likely fell. This pressured average revenue per user and therefore the revenue result.

On profitability, while Snap missed estimates, it is still moving closer to profits. Adjusted earnings per share was 3 cents, beating estimates of 1 cent. Analysts expect the company to be profitable on an earnings basis before interest, tax and non-cash expenses for all of 2020, as revenue grows while gross margins expand on the back of abating infrastructure costs.

Free cash flow came in at negative $76 million, badly missing estimates of $31 million, but improved over last year’s cash burn of $148 million. Negatively, management said almost nothing on the earnings about why the miss was so large.

But here’s the point: Analysts see Snap continuing to monetize users at a faster rate, while keeping costs in check.

Moffett Nathaonson analyst Michael Nathnason wrote in a note he estimates Twitter’s revenue per user was $55 in 2019, while Snap’s was at $14. As Snap continually tweaks its ad format, attracting ad dollars, and engaging users, bringing impressions higher, Snap’s revenue per user can converge with Twitter’s.

As for costs, “Gross margins continue to expand strongly (55% in Q4),” Mahaney said, citing abating infrastructure costs and efficiency improvements.

Meanwhile, Snap trades at roughly 10 times its 2020 expected sales, in line with its level for the past two years and only a tick higher than the slower growing Twitter’s valuation. Mahaney is looking for sales to compound annually at a rate of 35% for the next three years.

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