Key Takeaways

  • Adjusted EPS was $0.01 vs. the -$0.05 analysts expected.
  • Revenue significantly exceeded analyst expectations.
  • Daily active users was higher than consensus estimates.

What Happened

Snap's Q3 FY 2020 earnings continued the strong performance the company has enjoyed throughout the year in the midst of the COVID-19 pandemic. Snap exceeded analyst expectations on daily active users, revenue, and adjusted EPS. Daily active users climbed by 18% YOY to 249 million, above analyst predictions of 243.9 million for the quarter. Revenue increased 52% YOY to $679 million, significantly surpassing predictions of $550.1 for Q3. The company also generated adjusted EPS of $0.01, compared with a predicted -$0.05 per share. Snap stock sharply increased immediately following the earnings report.

(Below is Investopedia's original earnings preview, published October 14, 2020)

What to Look For

Social networking company Snap Inc. (SNAP) has been on a roll amid the COVID-19 pandemic. It beat revenue estimates by a wide margin in Q2 FY 2020 as advertising sales rebounded, and its shares have dramatically outperformed the market thus far this year.

Investors will watch to see if Snap can continue that growth when it reports earnings for Q3 FY 2020 on October 20 after the market close. Analysts expect quarterly losses to widen on an adjusted earning per share (EPS) basis as revenue rises at a strong, but slower pace, compared to the same quarter a year ago.

A key metric that investors will focus on is Snap's daily active users (DAU), a measure of user growth that helps determine how much the company is able to charge for advertising. Snap depends on advertising for nearly all of its profit and revenue. Analysts estimate that Snap will continue to grow its DAU in Q3 at a slower, but still strong pace, relative to Q3 2019.

Snap stock has significantly outperformed the broader market, with a trailing 1-year total return of 96.2%, more than 5 times the S&P 500's total return of 18.4%.

One Year Total Return for S&P 500 and Snap
Source: TradingView.

Although Snap has posted significant gains in revenue and daily active users since going public in 2017, the company has continued to struggle to generate a profit. Out of the past 14 quarters, Q4 FY 2019 was the only one in which Snap reported earnings on an adjusted EPS basis. For Q3 FY 2020, consensus estimates predict that Snap's quarterly loss will widen by one cent a share to -$0.05 per share compared to the same quarter a year ago. That estimated loss, though, is less than -$0.08 adjusted EPS in Q1 and -$0.09 in Q2 of FY 2020.

In spite of its profit struggles, Snap's revenue growth has been robust since it went public. Revenue rose a healthy 17.0% pace in Q2 FY 2020, but that was the slowest growth in 14 quarters. In 2019, quarterly growth ranged from 38.9% to 43.9%, for example. Analysts expect Q3 FY 2020 revenue of $550.1 million, which amounts to YOY growth of 23.3%.

Snap Key Metrics
  Estimate for Q3 2020 Actual Q3 2019 Actual Q3 2018
Adjusted Earnings Per Share -$0.05 -$0.04 -$0.12
Revenue (in millions) $550.1 $446.2 $297.7
Daily Active Users (in millions) 243.9 210.0 186.0

Source: Visible Alpha

Like other social media companies, a primary driver of Snap's stock and financial growth is its number of daily active users, or DAU. DAU measures the number of people who utilize a Snap app or visit the company's website each day. Another important related metric is average revenue per user (ARPU), which reflects the average revenue generated by each user of the site or app. Together, DAU and ARPU present a picture of both the size of Snap's user base and how successfully the company monetizes that base mainly through advertising. Snap needs to produce strong growth in daily active users to attract advertisers.

Snap's daily active users have climbed steadily for the past five quarters after plateauing at between 186 million and 191 million users for six straight quarters ending Q1 FY 2019. Since Q2 FY 2019, Snap's daily active user base has been at least 203 million. The company's DAU growth accelerated YOY each quarter from Q2 FY 2019 through Q1 FY 2020. That pace slowed slightly in Q2 FY 2020 to 17.2% YOY as Snap reported an all-time high of 238 million daily active users. That record could be topped in Q3, as analysts predict 243.9 million daily active users, a slight slowdown in YOY growth relative to the previous quarter at 16.1%.

As Snap's daily active users rise, Snap could see its average revenue per user (ARPU) begin to recover as well. Q2 FY 2020 marked the first YOY decline to ARPU since Snap went public, as this metric fell by 0.2% YOY to $1.91. But analysts see a rebound. They estimate ARPU of $2.26 for Q3 and also $2.88 for Q4. While these would reflect the highest ARPUs in about three years, the growth rate would be the slowest since 2017.