What Happened

Snap reported a double miss on February 4, failing to meet both revenue and earnings expectations. While it managed to slightly surpass its expected DAU numbers, its revenue shortfall indicates it is struggling to monetize its user base. Snap's stock dropped 8% in after-hours trading.

(Below is Investopedia's original earnings preview, published 1-28-20)

What to Look for

Shares of Snap Inc. (SNAP) have soared in the past year on surging revenue and traffic growth, marking a striking turnaround from the stock's decline after it went public less than three years ago. Investors will be closely watching whether the social media platform can keep up that growth when it reports Q4 2019 results after the close of trading on February 4. The key metric investors are likely to focus on to measure Snap's health will be growth in average daily users (DAUs), which helps determine how much the company can charge for advertising. Analysts currently expect a sizable growth in revenue and daily users in Q4, along with shrinking net losses.

A key challenge is that Snap has not posted a profit in the 11 quarters since the stock opened on the public exchanges in 2017 . Nonetheless, the stock has outperformed the S&P 500 by a wide margin in the last 12 months, rising an impressive 193% compared to 23% for the index. The stock is still trading lower than the day it went public.

SNAP
TradingView.Com 

Snap's revenue growth was mixed in 2017 and 2018, expanding quickly in the first year after the IPO and slowing down in the second year. Growth began to recover in 2019, with revenues surging YOY by 38.9% in Q1, 48.0% in Q2 2019, and 50.0% in Q3 2019. Revenue is expected to rise by at as slightly slower, but still healthy 44.6% in Q4.

While Snap has never been profitable, its earnings per share (EPS) losses have narrowed sharply. The company's $0.23 loss in Q1 2019 shrank to a loss of $0.19 in Q2 and then red ink of $0.16 in Q3. Analysts expect for Q4 a $0.12 loss, about half as big as Q1.

The Q3 2019 loss marked an upside surprise in October but the stock reacted by selling off 5.9% during the regular market session. It bottomed out the next day and turned higher, staging a strong rebound into the last week of January 2020.

Snap Key Metrics
  Estimate for Q4 2019 Actual Q4 2018 Actual Q4 2017
Earnings Per Share -$0.12 -$0.14 -$0.28
Revenue (in millions) 563.7 389.8 285.7
Daily Active Users (in millions) 215.0 186.0 187.0

Source: Visual Alpha

Like Twitter Inc. (TWTR), the real driver of Snap’s stock is its number of daily active users. DAU measures the number of people who visit the Snap website or utilize its apps each day.  An important related metric is average revenue per user (ARPU), which is the average revenue generated for each user of the site or app. These numbers combine to form a picture of how large the company’s customer base is and how well it monetizes that base, primarily through advertising.

Following the company's 2017 IPO, Snap’s daily active users steadily increased each quarter until 2018, when they dropped from 191 in Q1 million to 188 million in Q2. DAUs started to grow again in Q1 2019 and rose above 200 million for the first time in Q2. The growth rate accelerated from 8.0% in Q2 2019 to 12.9% in Q3 2019. Analysts expect banner growth in Q4, estimating a 15.6% increase.

Snap’s average revenue per user (ARPU), another key metric, is showing improvement. It increased through Q4 2018, slumped during the first half of 2019, and then rebounded the final two quarters of the year. Analysts expect a 25.4% increase in ARPU to $2.60 in Q4 in the upcoming report. While that's the largest average revenue per user for Snap since it went public, the 25.4% growth is the slowest recent quarters.