Shares of Snap (SNAP), parent of popular messaging app Snapchat, plunged as much as 17% Friday following the company’s second quarter earnings results.
After the market close Thursday, the company reported Q2 numbers that — on virtually every important measure — missed analysts' estimates, driven by intense competition from rival Facebook (FB). But was the quarter as bad as the stock’s reaction implied? More importantly, with expectations having fallen so low following its second terrible quarter in a row, SNAP’s valuation ($14 billion market cap, down from IPO market cap of $26 billion) now looks interesting at these levels.
Is it time to go long SNAP stock?
Here’s what we know: For the three months that ended June, the Q2 net loss came to $443.1 million, or 16 cents per share (excluding certain items). Aside from missing estimates for a loss of 15 cents, Wall Street got spooked because the net loss was nearly three times what the company delivered a year ago. In terms of revenue, which came to $181.7 million, up 153% from $71.8 million in the year-ago period, it still fell short of the $186.2 million analysts were looking for.
But here’s what we don’t know and what is now up for debate: has the stock’s punishment been too severe? With SNAP stock falling to a new all-time low Friday to $11.77, which amounts to a 31% decline below it March IPO price of $17, is now the time to play the long game with SNAP stock? The top- and bottom-line misses aside, the company did, however, add 7.3 million daily active users (DAUs) during the quarter, bringing its total up from 166 million in Q1 to 173 million, marking 4% sequential rise.
Obviously, compared to Facebook, which during its second quarter, added 70 million users worldwide and two million users in North America, crushing its own estimates, Snap’s numbers don’t appear so impressive. Compared to Twitter, however, which delivered no user growth, Snap is not operating that badly, especially since the company’s focus is primarily on U.S. and Canadian users — something the company continues to defend.
In a conference call with analysts Thursday, co-founder and CEO Evan Spiegel explained the company’s reasoning for not taking a more global approach. "The market continues to focus on daily active users as a proxy metric for revenue opportunity," Spiegel said. "We’d have to add more than 10 million daily active users in the rest of the world for every 1 million daily active users in the U.S. and Canada in order to make the same amount of money.”
In other words, the cost of adding the additional users would pressure the company’s profits even more since it would require additional expenses such as hosting fees. As such, instead of total users, it makes since to focus on the average revenue per user SNAP generates, which despite coming in below Street expectations, rose 109% year over year and 16% sequentially to $1.05.
It’s likely for this reason, several analysts, including Stifel which has a Buy rating on the stock and $18 price target, aren’t ready to write the company off yet. “We are lowering our expectations for revenue growth in 2017 as pricing presents a near-term headwind and decreasing our price target to $18,” Stifel wrote, “however, we continue to recommend the company as SNAP shares could offer compelling upside when monetization reaches an inflection point.”
SNAP must nonetheless figure out how to better monetize its platform, and show it in the numbers, before investors will get excited about the stock. From current levels, however, the risk-versus-reward scenario has turned positive, especially given the likelihood that anyone who has wanted to exit their positions have already done so.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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