Snap (NYSE: SNAP) Gives Investors A Mixed Bag

It’s looking like it could be a volatile end to the week of shares of Snap (NYSE: SNAP), the social media giant. They reported their Q1 earnings after yesterday’s bell and the numbers were well off the mark. Non-GAAP EPS was in the red at -$0.02, when a minor profit had been expected by Wall Street. While revenue was up 37% compared to the same quarter last year, it was also below what analysts had been expecting. 
Shares swung back and forth in Thursday’s after-hours session as investors got to grips with the numbers, but for the most part it has to be said they were disappointed. While user growth was relatively strong, with daily active users jumping 18%, it did break a streak of five straight quarters of more than 20% growth. CEO Evan Spiegel struck an optimistic tone and told investors with the report that despite the apparent slowdown, the business still had “underlying momentum in a challenging operating environment. He added “we remain focused on providing value for our growing community, delivering ROI for our advertising partners, and investing against our enormous opportunity in augmented reality."

Short Term Headwinds

By way of explaining the softer than expected numbers, Spiegel pointed to the war in Ukraine, noting that the company “could expect additional campaign pauses or advertiser budget reductions. A large number of advertisers paused their ad campaigns in the days following Russia's invasion of Ukraine in late February - and while the majority of advertisers resumed their campaigns, many remained concerned about inflation and continuing geopolitical risk”. 

In addition, comparing current performance to the same quarter of 2021 is a tough ask for most companies at the moment, as the geo and macro landscape has changed so much. Higher inflation readings, increasing interest rates, and disrupted supply chains make for a tough background against the seemingly endless optimism and appetite for risk that dominated markets for much of last year. 

Looking ahead, the company is forecasting a return to 20% plus user growth, and is aiming to land somewhere between 20% and 25% in Q2. The stock finished down nearly 5% on Thursday and was flat in Friday’s pre-market session. It will be interesting to see what way it will go into the weekend, with shares already close to their lowest levels since 2020. The previous earnings report in February had resulted in a 20% gap down at the next open, so investors will be hoping to avoid a similar fate today. 

The more bullish investor will point to the 37% revenue growth and jump in user numbers, which in the face of Netflix’s (NASDAQ: NFLX) subscriber contraction this week look a lot more attractive. It would have been nice if the company had managed to turn a profit this quarter as it could have set the scene for a solid recovery story going into the summer. 

Considering The Opportunity

Snap shares are currently down more than 65% from last year’s all time high, and it will be all investors can do to stop shares breaking below the $28 line which they’ve managed to just barely hold this year. It would be some fall from grace if that is actually given up and Snap would risk being counted among the likes of Peloton (NASDAQ: PTON), Zoom Video (NASDAQ: ZM) and DocuSign (NASDAQ: DOCU) as just another high flying tech stock that couldn’t do it when it counted.

For what it’s worth though, it was only last month that Baird were out with a Buy rating on Snap stock. Analyst Mark Zgutowicz gave them a fresh $50 price target on the basis that Snap is "best positioned to capture incremental digital advertising market share in coming years." Shares are down close to 30% since then, and that price target currently implies there’s upside to be had in the region of 65%. Depending on how investors react to what could just be a temporary slowdown in growth last quarter, there could be an argument for dipping the toe in. Let’s see if the line of support can hold first, and go from there.