Key Takeaways

  • Adjusted EPS was $0.09 vs. the $0.07 analysts predicted.
  • Revenue also exceeded analyst expectations.
  • Average daily active users (DAU) grew faster than consensus estimates had predicted.


What Happened

In its Q4 FY 2020 report, Snap crushed analyst predictions across multiple categories. The company's daily active user (DAU) rate for the quarter was 265 million, an improvement of about 22.0% YOY and solidly ahead of the 257.7 million analysts had predicted. Adjusted EPS of $0.09 marked growth of 200.0% YOY and was also higher than the $0.07 analysts had called for. Revenue posted the most pronounced YOY increase, climbing by 62.5% YOY to $911.3 million when analysts had predicted $853.0 million for the quarter. In spite of these successes, Snap shares dipped immediately following the earnings release, signaling that investor caution may persist.

(Below is Investopedia's original earnings preview, published February 2, 2021.)

What to Look For

Snap Inc. (SNAP), the social networking company, dramatically beat analysts' revenue estimates in its most recent quarterly earnings report. The news sent shares skyrocketing, further fueling its shares amid the COVID-19 pandemic. But despite Snap's strong advance, the company also faces intensifying competition from rival platforms such as TikTok, which could slow the company's growth in advertising and users.

Investors will look to see if Snap can continue to post rapid growth amid these rising challenges when the company reports earnings for Q4 FY 2020 on February 4 after market close. Analysts estimate that adjusted earnings per share (EPS) will more than double year-over-year (YOY). Revenue is expected to accelerate sharply from Q4 2019.

Investors also are likely to watch another key metric: Snap's average 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 predict that Snap will post healthy growth in DAU in Q4. That growth also is expected to be at a slightly faster pace relative to Q4 FY 2019.

Shares of Snap have significantly outperformed the broader market in the past year. Snap stock fell faster than the market at the outset of the pandemic, but began to outpace the market starting in April. Further fueled by October's unexpectedly strong earnings report, Snap shares have staged a rapid advance for much of the past three months. As a result, Snap has provided a total return of 211.9% in the past year, about 13 times the S&P 500's total return of 16.2%, as of February 1.

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

Snap's soaring stock price in the past year comes despite a historic string of net losses. As measured by adjusted EPS, Snap has made a quarterly profit only twice in the past four years: Q4 FY 2019 and Q3 FY 2020. For the first time in at least four years, analysts now expect the company to report a second straight sequential quarter of positive adjusted EPS. Analysts estimate adjusted EPS of $0.07 for Q4 FY 2020, a 132.4% increase.

Snap's quarterly revenue has grown much more consistently over the past four years. From a high growth rate of 285.7% YOY in Q1 FY 2017, the pace of revenue increases slowed to 36.5% in Q4 FY 2018. Since then, quarterly growth has generally accelerated, reaching as high as 52.1% YOY in Q3 FY 2020. The big exception was 17.0% YOY growth in Q2 of that year. Analysts now expect that Snap's revenue will rise 52.1% for the second consecutive quarter in Q4 FY 2020.

Snap Key Metrics
  Estimate for Q4 FY 2020 Q4 FY 2019 Q4 FY 2018
Adjusted Earnings Per Share ($) 0.07 0.03 -0.04
Revenue ($M) 853.0 560.9 389.8
Average Daily Active Users (millions) 257.7 218.0 186.0

Like other social media companies, a primary driver of Snap's stock and financial growth is its number of average daily active users, or DAU. DAU measures the number of registered Snap users who open the Snap app at least once during a 24-hour period. DAU helps to present a picture of both the size of Snap's user base and the potential for monetizing that base mainly through advertising. Snap needs to produce strong growth in daily active users to attract advertisers.

Snap has posted six consecutive quarters of strong DAU growth YOY since Q2 FY 2019, when the company first topped 200 million DAU. Between Q2 FY 2019 and Q3 FY 2020, DAU rose by a total of about 25% to 249.0 million. Analysts predict a seventh quarter of strong DAU growth in in Q4 FY 2020, rising 18.2% YOY. For all of FY 2020, analysts expect DAU to rise by 15.8%, only a slight deceleration from the previous year.