Popular social media platform operator, Snap (NYSE:SNAP) faces a huge task when it reports its second-quarter earnings tomorrow. It has to justify the 190% surge in its stock price since the December low by showing that it can sustain improvement in its user engagement metrics and sales.
The operator of its photo-sharing app, Snapchat, is gaining traction after a disastrous 2018 when the number of users shrank, some of the top executives left and teenagers didn’t like the redesign of its app.
In its last earnings report in late April, Snap showed that that trend is reversing. User numbers had stopped shrinking — revenue growth was better than expected, and the Snapchat app added 4 million daily users.
Snap’s games platform and new augmented reality features which enabled users to add graphics to their hands, feet or bodies are among the features that have been very popular in recent months, in addition to the app’s face-distorting lenses, and a gender-swap lens that turns a man face into woman, and vice versa.
“We believe product improvements and feature additions are driving positive trends in user growth and engagement that, along with monetization improvement from ad tech initiatives, should drive upside to consensus estimates,” wrote Goldman Sachs analysts, in a note to clients this month, raising their rating on the stock to buy from neutral and boosting their 12-month price target to $18 from $13.
The stock price has gained about three times since hitting a record low of $4.99 on Dec. 21, closing at $14.01 on Friday. The shares are up 145% this year, trouncing every member of the S&P 500, whose top performer, Advanced Micro Devices (NASDAQ:AMD), is up 76% in 2019.
Snap’s improving financial and user metrics have no doubt played a big role in its stock’s outperformance this year, but the regulatory oversight that the large social media companies are facing is another big positive for Snap.
An app with a clear and defined audience and with little room for misuse is in a much better position to withstand potential regulatory changes globally than behemoths like Facebook (NASDAQ:FB) and Alphabet’s Google (NASDAQ:GOOGL) — the social media heavyweights that some politicians want to break.
Despite this strong comeback, however, investors who bet on Snap stock at the time of its IPO in 2017, are just recovering their losses after losing on other money-making opportunities. The benchmark S&P 500, for example, gained about 25% during that period.
Snap, in our view, remains a highly volatile stock and not suitable for long-term investors due to its uneven user-engagement record, escalating costs, and a higher turnover among its top executives. Instagram, owned by much bigger rival Facebook, continues to pose an existential threat to Snap that's unlikely to go away. Due to these uncertainties, we don’t recommend risk-averse investors buy this stock.
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