Snap Shares Showing Signs Of Life, But Q1 Earnings May End Optimism

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* Reports Q1 2019 results on Tuesday, April 23, after the close
* Revenue expectation: $305.5 million
* EPS expectation: -$0.22

Popular social media platform operator, Snap (NYSE:) has set itself a high bar for its , after giving beaten-down investors hope that the worst is over for user engagement after a disastrous 2018.

The operator of its photo-sharing app, Snapchat, that it had stopped losing users in the last quarter of 2018, and indicated that the number for Q1 2019 won’t look bad. Investors then gave the company the benefit of the doubt and sent its shares soaring 100% higher from their December plunge.

The stock, however, has fallen in six of the past eight sessions, closing yesterday down 1.2% at $11.53.

The volatility and positive forecast may seem exciting, but Snap’s stock has shown scant stability. Perhaps worse, its management hasn’t demonstrated much steadiness. Even though Snapchat remains popular among teens and the celebrities they follow, the operator has been hurt by too many management missteps in the past year.

The biggest miscalculation Snap CEO and co-founder Evan Spiegel made was the vaunted redesign of the app. Unfortunately, once it was unveiled, the move didn’t resonate well with existing users. Worse still, it didn’t improve overall engagement, which was the primary rationale behind the effort.

Then came the departure of top executives, giving the impression the company’s turnaround is failing to convince key players within the management team. In October, Chief Strategy Officer Imran Khan left the company; content chief Nick Bell left in November; and in January Chief Financial Officer Tim Stone resigned after just eight months in the job.

Too Early for a Bull Case for Snap

Amid this chaos, some investors are seeing signs of a rebound. Snap’s sales in the fourth quarter beat both the company’s forecast and analysts’ predictions. Though Snap failed to add any new users since the prior period, investors were relieved that the numbers didn’t fall, taking it as a sign that the company’s turnaround plan is working.

In a bid to win in a highly competitive digital ad market, Snap recently announced an expanded advertising network, improved augmented reality and camera features, a new video-game service and original shows.

But despite this renewed optimism by the market, we feel it’s too early to put together a bull case for Snap, whose turnaround is very much a work-in-progress. We don’t expect the company to report an impressive improvement in its Q1 numbers. Snap faces tough competition from much bigger rival Facebook’s Instagram app, which is winning big in the market it’s targeting.

According to an industry research firm, EMarketer, Snapchat is predicted to lose users in the U.S. for the first time this year. The app will have 77.5 million monthly U.S. users in 2019, a 2.8% decline from a year earlier, the research firm said, blaming fans’ dissatisfaction with the redesign of the app.

Even if we assume that the company will, at some point, overcome these challenges, as well as the high turnover of key executives, we still find it difficult to imagine a real future for this app. Especially in light of its forced competition with Facebook (NASDAQ:), a powerful opponent with deep pockets and a very strong relationship with advertisers.

Bottom Line

After all the blunders in 2018, Snap has an uphill task ahead to show that it’s on the right track to improve user engagement and overcome its internal challenges. The company must consistently show that it’s winning on these metrics before we’d be comfortable saying its shares have seen the worst and are finally a good buy.

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