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Snap Q3 Earnings Preview: Stock’s 50% Jump Indicates Strong User Growth

  • Reports Q3 2021 results on Thursday, Oct. 21, after the market close
  • Revenue Expectation: $1.1 billion
  • EPS Expectation: $0.08

When Snap (NYSE:SNAP) releases its latest earnings report on Thursday, Oct. 21, investors will focus on the photo-sharing app’s explosive user growth, which has fueled a powerful rally in its stock during the past year.

Snapchat, the mobile app for sending disappearing messages and watching video content, had 293 million daily active users in the second quarter. For the quarter that ended Sept. 30, the company projects that daily active users will climb to 301 million and revenue will grow between 58% and 60%.

For comparison, Twitter (NYSE:TWTR) reported 206 million daily users in the second quarter.

Snap’s performance is quite remarkable given that just a couple of years ago it was struggling to compete with social media giants, like Facebook (NASDAQ:FB) which almost copied every feature that Snap launched to lure its young audience.

The turnaround triggered a massive rally in Snap shares, which gained more than 50% this year, adding to the 170% rally for the stock in the past 12 months.

Snap Weekly Chart.
Snap Weekly Chart.

The COVID-19 pandemic played a big role in the increase of user numbers, too, swelling ad sales as companies of all sizes turned to social media platforms to reach customers who were stuck at home. CEO Evan Spiegel and his team tactfully channeled this traffic boom to ramp up the app’s appeal for advertisers. Sales in the second-quarter more than doubled when compared with the same period a year ago, hitting $982.1 million.

The majority of analysts polled by Investing.com still maintain an “outperform” rating on the stock, with the 12-month consensus price target showing about 13% upside from its current level. Snap closed Tuesday at $76.43.

Consensus Estimates.
Consensus Estimates.

Chart: Investing.com

50% Revenue Growth

These bullish projections show that analysts believe in the company’s strategy to fuel growth via the deployment of its Arcadia studio offering users augmented reality tools and expanding in international markets.

The social-media company forecasts that it could generate revenue growth of 50% or more for several years, as advertisers increasingly look to tap Snap’s Arcadia AR tools, which let users try on products virtually. On the global front, the company is adding more local content, investing in regional marketing campaigns, and offering more language support to products.

That being said, the company could see some slowdown in user growth after the unusual surge in traffic during the pandemic. For investors, the important question is whether the post-pandemic environment will justify these elevated valuation levels. With so many new businesses trying to advertise on Snap for the first time during the pandemic, it’s possible growth will slow as the surge cools.

Another threat creating uncertainty for many social media companies is Apple's (NASDAQ:AAPL) latest software update in which the company has started to ask iPhone users whether they are willing to be tracked for advertising purposes by each app.

Snap said in July its users were opting into tracking more often than some of the industry’s reported averages, but that it won’t see the full effect of the change until the third quarter or later.

Bottom Line

Snap’s latest earnings are likely to show continued growth in the company’s user base and sales. The company's key strategic moves and its focus on a young audience have turned into a rare, late-blooming success story in the social media domain. That phase, in our view, has more room to run and any post-earnings weakness should be taken as a buying opportunity.

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