Snap Inc. (SNAP) is scheduled to report results of its third fiscal quarter after market close on October 22, with a conference call scheduled for 5 pm ET. What to watch for:
1. USER GROWTH: With its last report, Snap said it had added 13M Daily Average Users, or DAUs, in the second quarter. DAUs were 203M in Q2 2019, compared to 190M in Q1 2019 and 188M in Q2 2018. The average number of Snaps created every day grew to more than 3.5B in Q2, the company added.
2. ANALYST SENTIMENT IMPROVED: In the months between Snap's Q1 and Q2 reports, at least four Wall Street firms - Pivotal Research, Aegis, Goldman Sachs and Stifel - upgraded the stock to Buy or equivalent ratings. Since the company's Q2 report on July 23, sentiment on Wall Street has continued to get more bullish, starting with UBS analyst Eric Sheridan having upgraded the stock to Neutral from Sell on the day after the company's last earnings. That report showed "across the board progress" on all three key debates - user growth, revenue, and leverage, said Sheridan, who felt he "must acknowledge the turnaround" in Snap's underlying operating trends.
On September 3, Evercore ISI analyst Kevin Rippey upgraded Snap to Outperform from In Line and raised his price target for the shares to $20 from $18. While he had been impressed with the trajectory of Snap's fundamentals through much of 2019, Rippey said he remained on the sidelines on the view that valuation fully captured the upside related to the company's advertising business. However, the company's move into gaming, while in very early stages, took him off the sidelines as he believes gaming could provide Snap with about $350M in revenue at attractive EBITDA margins by 2022, Rippey said.
Two weeks later, Susquehanna analyst Shyam Patil upgraded the stock to Neutral from Negative after advertising channel checks that suggested to him that Snap's "solid" growth had continued. The analyst, who raised his price target on the shares to $18 from $12, saw many reasons for the continued momentum, including improved self-serve capabilities, benefits from the sales reorganization, and lower-cost inventory. Looking at the second half of the year expectations, the analyst thinks Snap's guidance of 2M-4M net adds for the third quarter and suggestion of 4M-6M for the fourth quarter are "very achievable, if not beatable." However, he argued that the stock's valuation is keeping him from getting even more constructive.
On September 24, Guggenheim analyst Michael Morris upgraded Snap to Buy from Neutral with a price target of $22. He believes the combination of "strong" usage trends, "industry-leading" access to 18-34 year-old users, and platform improvements should drive growth in Snap's advertiser demand. Further, the analyst says Snap's long-term revenue potential is the most underappreciated in his coverage universe.
Earlier this month, Morgan Stanley analyst Brian Nowak upgraded Snap to Equal Weight from Underweight with a price target of $17, up from $14. The analyst acknowledges that in the year-to-date he has underestimated Snap's stronger execution and ability to drive growth. He also has growing confidence that Snap's management is "laser focused" on reducing costs and improving efficiency, Nowak added. Also during this month, Arete analyst Rocco Strauss upgraded Snap (SNAP) to Buy from Neutral as he contends that the company looks "significantly" better positioned in the near-term than Twitter (TWTR) to benefit from ad dollars flowing into vertical video ads and e-commerce. Most recently, BofA Merrill Lynch analyst Justin Post upgraded Snap to Buy from Neutral with an $18 price target. The stock has sold off despite "solid" industry and advertising spend channel checks, Post said on October 18. In addition, the ongoing Discovery content rollout gives him higher conviction on Snap's ability to expand its average revenue per user. He also believes the possibility of a first positive EBITDA quarter in Q4 could change the stock's narrative.
3. FACEBOOK LAUNCHES THREADS: On October 3, Facebook (FB) said in a blog post that it was launching Threads from Instagram, a new camera-first messaging app that helps users stay connected to their close friends. Facebook said it built Threads to be "a new way to message with close friends in a dedicated, private space." Via the standalone app, users can share photos, videos, messages, Stories and more with their Instagram close friends list, the company said.
On October 10, Business Insider's Paige Leskin said Instagram's Threads appeared to be off to a slow start a week after its launch, citing data from app analytics provider Apptopia. The supposed competitor to Snapchat was estimated to have been downloaded by only 220,000 people across both iOS and Android devices, which is "significantly less than 0.1% of Instagram's total number of monthly active users," said Leskin.
