Snap Inc. (SNAP) stock is in the midst of a renaissance in 2019, reversing much of the damage from a tumultuous 2018. The question for investors is whether there is still time to ride the rebound.
Shares of the Santa Monica, California-based social media player have risen more than 150% year to date, building back up to a level not seen for over a year and rewarding some investors who managed to remain confident as the stock touched all-time lows late last year.
Shares were up about 3% before Tuesday's opening bell as investors await its second-quarter earnings report after the close.
Wall Street is anticipating a non-GAAP loss of $0.10 a share, a marker in line with the previous quarter. But revenue may be the real test as a consensus target of $360 million comes in at the very top of the guidance range offered by CEO Evan Spiegel in April.
While many investors are skittish to invest in a company in the red, especially one not expected to be free cash flow positive for another two years, some analysts are finally coming off the sidelines to signal that it's time to buy the story at Snap, profits or not.
All About the Users
"Based on improving DAU/pricing trends, we are upgrading SNAP shares to Buy and raising our Target Price to $17," Stifel analyst John Egbert said in a note on Monday. "We are increasingly optimistic about Snap's growth prospects in 2H:19 and beyond."
As many will recall, daily active users (DAU) has been the pivotal statistic for Snap in its still short history. The main driver of its slide in the back half of 2018 was a decline from 191 million daily active users in the first quarter to 188 million in the second and 186 million for the latter two quarters of the year.
The downturn in users was largely blamed on a redesign that irked many of the influencers keeping Snappers engaged on the platform.
sooo does anyone else not open Snapchat anymore? Or is it just me... ugh this is so sad.— Kylie Jenner (@KylieJenner) February 21, 2018
"The biggest mistake we made with our redesign was compromising our core product value of being the fastest way to communicate," Spiegel wrote in a leaked memo to employees late last year. "Our redesigned algorithmic Friend Feed made it harder to find the right people to talk to, and moving too quickly meant that we didn't have time to optimize the Friend Feed for fast performance. We slowed down our product and eroded our core product value."
After seeing daily active users rise to 190 million earlier this year, the growing pains of the platform changes may have begun to wear off, Stifel's Egbert suggests, allowing SNAP to focus on driving revenue growth and pushing toward profitability.
"Although Snap's strong DAU trends during 2Q were fairly evident, we think some positive signs in the ad business have been relatively overlooked," Stifel's Egbert noted. "Snap's multi-year transition toward programmatic/self-service advertising has led to steady declines in avg. ad pricing since 2017. However, suggested bid rates for Snap Ads (Snap's most basic ad units) have shown signs of potential stabilization as month to month declines have slowed in a number of key developed & developing markets."
Too Pricey a Play?
Still, even with the positive signs poking through, playing the earnings game on Snap has been a dicey one through its history as a public company.
FactSet data reveal that the stock has made an average move of 17.73% on earnings, with only two of its nine releases yielding positive results. As such, the risk of an earnings disappointment dropping shares through the floor is quite real.
On the point of expectations, more cautious analysts have warned that there is simply too much priced into the stock at this point.
"Notwithstanding fierce competition for user mindshare and advertiser dollars and a history of being hugely unprofitable, progress towards profitability, stabilizing user growth and improved execution have benefitted Snap's outlook," Wedbush analyst Michael Pachter said. "The company's current share price leaves little room for upside, however, and we are reiterating our Neutral rating."
In light of the volatile dynamics in Snap shares it might not be the most advisable name to chase into earnings, Pachter suggested.
"With shares currently trading around 10x the consensus 2020 revenue estimate and slow progress toward profitability, current valuation leaves little room for multiple expansion, as greater investor confidence in current management and the potential for earlier-than-expected profitability appear to be largely priced in," Pachter wrote.
The bulk of estimates on Wall Street do fall more in line with Pachter's view, with the FactSet consensus coming in at Neutral and a price target that remains slightly below Tuesday's implied open.
The earnings release after the bell will be a pivotal time to either cement a rebound or diminish a drive toward regaining market credibility.