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Snap (SNAP) to Report Q3 Earnings: What's in the Cards?

Snap Inc. SNAP is set to report third-quarter 2017 results on Nov 7.

Last quarter, the company reported loss per share of 36 cents, much wider than the Zacks Consensus Estimate of a loss of 29 cents and the year-ago quarter’s loss of 14 cents.

Revenues of $181.7 million missed the Zacks Consensus Estimate of $186.9 million but registered an increase of 153% year over year. However, revenue growth showed a declining trend when compared sequentially.

Notably, shares of Snap have lost 40.6% of their value since its listing date of Mar 2, 2017 against 20.7% growth of its industry.

Let's see how things are shaping up for this announcement.

Factors at Play

The company’s growth prospect depends on two key factors – user base growth and ad revenues.

The company is aggressively ramping up its original content efforts to drive user base. In July, it partnered with NBC News to produce a twice-daily headline news show Stay Tuned for the Snapchat app to reach the highly sought-after millennial cohort, per media reports.

Per Snap, within a month of its July release, Stay Tuned was able to draw “more than 29 million unique total viewers” to the platform. The company also added that over 40% of the viewers watched the show minimum thrice a week.

Moreover, Snap has been trying to combat all odds by adding a number of new features on its platform to boost engagement and user growth which is expected to drive growth in the soon-to-be reported quarter. According to a recent report by Axios, Snap witnessed a 40% increase in user engagement since it unveiled its location-based Map feature in June 2017.

Per recently released Piper Jaffray’s 34th semi-annual Taking Stock with Teens survey, the company’s messaging application Snapchat is the most preferred social networking medium among teens. Reportedly, 47% of the respondents (with average age of 16 years) said that they prefer using Snapchat compared with 12% respondents in the fall 2016 survey.

This shows that the company’s user base growth is well supported by its high popularity among teens. It should be noted that, user growth holds the key to attracting advertisers, the primary source of revenues for Snap. In second quarter, Snap recorded 173 million daily active users (DAUs), representing a 21% year-over-year increase, mainly driven by growth in North America and European markets.

However, there is another side of this survey. Per Piper Jaffray’s report, the company doesn’t enjoy a “unique user base” as 90% of the users also use Facebook’s FB Instagram.

Stiff competition from the likes of Alphabet GOOGL, Facebook and Twitter TWTR in the digital ad market remains an area of major concern. The total addressable market (TAM) of these companies is much larger compared to Snapchat. Therefore, they present a much larger canvas for advertisers. Notably, Facebook's huge user base of over 2 billion combined with Instagram’s strong user base of 800 million makes it highly attractive to advertisers.

In our opinion, though Snap’s rising user base is a positive, it may not be able to cash in on it like Facebook. Advertisers are more likely to opt for the latter’s Instagram whose TAM is thrice that of Snap's. To put it simply, it’s unlikely for advertisers to pay for Snap’s services as its reach is limited.

Therefore, we believe though the company’s user base and ad revenue will increase but the rate of growth will be in declining trend, as it has registered in the previous two quarters.

Also, the slash in 2017 U.S. ad revenue estimates for Snapchat by market research firm, eMarketer doesn’t bode well for the company.

We believe Snap’s lack of popularity in the international quarters, its sole focus on under-30 users and revenue concentration are the primary headwinds ahead of the third quarter earnings.

Zacks Rank

Snap carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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