Snap Earnings Preview: User Growth And ARPU in Focus

Snapchat parent Snap Inc SNAP reports second-quarter earnings after market close on Thursday, August 10. Since going public in March, shares have declined past the company’s initial public offering (IPO) price of $17 and recently hit a new low of $11.91 on August 3.                  

Like other social media companies that have gone public, some of the main focuses among analysts have been on SNAP’s user growth, average revenue per user (ARPU) and the company’s path to profitability.  In last quarter’s results, SNAP reported daily active users grew from 122 million in Q1 2016 to 166 million in Q1 2017, but that growth slowed on a sequential basis.

Turning to the revenue it is generating off those users, SNAP reported that ARPU in the first quarter increased 181% year over year to $0.90, but that it declined 14% sequentially compared to Q4 2016. Some analysts have expressed concerns over the results of last quarter’s user growth and ARPU. While it was just one quarter, analysts’ concerns could grow regarding the company’s path to profitability depending on the results in upcoming quarters.

According to CFRA analyst projections, SNAP isn’t expected to deliver annual non-GAAP profits until 2020 at the earliest, but they have said that they think the company “is poised to take notable market share in global mobile advertising.” With that, those analysts have also cautioned that a large number of companies will be vying for related revenues and that many businesses have also developed similar offerings and features.

Earlier in the year, Facebook Inc FB launched several features on its Instagram platform that appear to be inspired by Snapchat features and the Wall Street Journal recently reported that Alphabet Inc GOOG GOOGL Google is developing technology for publishers to create digital content that is similar to Snapchat’s Discover feature.

FIGURE 1: POST-IPO DECLINE. Snap (SNAP) shares have declined substantially since its IPO in March, hitting a new low of $11.91 on August 3, and is down 44.61% since it started trading. 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 Trading Activity

For the second quarter, SNAP is expected to report a loss of $0.14 per share, excluding stock-based compensation, on revenue of $187.2 million, according to Wall Street analyst estimates. In the first quarter, revenue declined on a sequential basis from $165.7 million in Q4 of 2016 to $149.7 million.

Shares have been pressured in recent trading leading up to some of the company’s lockup expirations that ended on July 29, which had prevented company insiders from selling their shares until a certain amount of time has passed. In trading today, shares ticked higher and were up 4.15%.

Around the upcoming earnings release, options traders have priced in about a 13.3% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the August 11 weekly expiration, calls have been active at the 13.5 strike price, while puts have been active at the 12 and 12.5 strikes.

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

In addition to SNAP’s results, there’s a string of retail earnings coming out on Thursday and Friday with reports from Macy’s Inc M, Kohl’s Corporation KSS, Nordstrom, Inc. JWN and J C Penney Company Inc JCP. When those results come out, investors might get a better picture of how these companies are adapting to shifting consumer shopping habits.