Key Takeaways

  • Adjusted EPS was -$0.09 vs the -$0.10 analysts expected.
  • Sales surpassed analysts expectations.
  • Daily active users roughly met analyst expectations.

What Happened

Snap reported lower-than-expected losses for Q2 2020, if only by a single cent. Revenue grew by less than during the same quarter last year, but still by significantly more than analysts expected. Snap's all-important number of daily active users (DAU) roughly matched expectations, coming in at 238 million vs. the 239 expected by analysts. Snap didn't provide Q3 guidance due to the pandemic and the accompanying economic disruptions. Shares of SNAP fell in after-market trading.

(Below is Investopedia's original earnings preview, published July 20, 2020)

What to Look For

Social networking company Snap Inc. (SNAP) saw its stock plunge by more than 55% from its 2020 high after missing revenue estimates in February and as the COVID-19 pandemic pulled down the stock market. But the stock since then has nearly tripled from its March lows as the company's revenue and daily active users have soared as millions of consumers sheltered at home amid the pandemic.

Investors will be watching to see if Snap can continue that growth when it reports earnings for Q2 FY 2020 on July 21 after the market close. The news is likely to be mixed. Analysts currently estimate that Snap's Q2 losses will widen on an adjusted per share basis as the company posts the slowest revenue growth in at least 14 quarters.

A key metric that investors will focus on is Snap's daily active users (DAU), a measure of 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 Snap posted robust growth in DAU in Q2 , the second-strongest growth rate in more than two years.

Reflecting investors' optimism, Snap's stock has dramatically outperformed the broader market, posting a total return of 64.4% in the past 12 months, nearly eight times bigger than the S&P 500's total return of 8.1%.

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

Since going public in 2017, Snap has struggled to make a profit even as its daily active users and revenue have surged. It has posted losses in every quarter except Q4 FY 2019. In 2Q FY 2020, analysts expect Snap's quarterly loss to widen on an adjusted EPS basis to -$0.10, 66% bigger than the loss of -$0.06 it posted in Q2 FY 2019. Snap's worst quarter was Q1 FY 2017, when it reported an adjusted loss per share of -$0.20.

While Snap has struggled to report a quarterly profit, revenue has been a different story. The company has achieved consistent and impressive revenue growth in every quarter since it went public. Consensus estimates of $438.9 million for Q2 FY 2020 are up more than 140% from Q2 FY 2017. However, this estimate places YOY revenue growth at 13.1%. While solid, this YOY improvement is significantly less than quarterly YOY gains for every other quarter in the last three years. In FY 2019, for instance, Snap's lowest YOY quarterly revenue growth was 38.9%, and in Q1 FY 2020 it was 44.3%.

Snap Key Metrics
  Estimate for Q2 2020 Actual Q2 2019 Actual Q2 2018
Adjusted Earnings Per Share -$0.10 -$0.06 -$0.14
Revenue (in millions) $438.9 $388.0 $262.3
Daily Active Users (in millions) 239.2 203.0 188.0

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 grown steadily since Q1 FY 2019, following a plateau in 2018 around 186 million users. The company climbed above 200 million DAU for the first time in Q2 2019 and saw growth in this metric on a sequential basis throughout 2019 and into Q1 2020. Last quarter, Snap reported 229 million DAU, an all-time high for the company. Analysts expect that this number will grow even higher in Q2 2020, with consensus estimates of 239.2 million DAU for the quarter, a 17.8% YOY increase.

While DAU is projected to reach new heights, Snap may struggle with average revenue per user in Q2 2020. In prior Q2 periods, this figure has climbed steadily: from $1.05 in 2017 to $1.40 2018 and $1.91 in 2019. For Q2 FY 2020, however, analysts predict a YOY decline of 3.8% to $1.84. This would mark the first YOY quarterly ARPU decline since Snap went public.