Snap Inc (NYSE:SNAP) will report is first quarterly results as a public company tomorrow. No doubt, there is quite a bit riding on this for SNAP stock.
Let’s face it, Snap Inc has been quite volatile since the company pulled off its IPO in early March. While the shares got off to a strong start, they have since trailed off. Consider that the range has been $18.90 to $29.44.
This compares to the IPO offering price of $17.
Now there are certainly some long-term trends that should help continue to fuel the growth. The company owns the must-have app for the Gen Z and Millennial generations – which are groups that are difficult for advertisers to reach. Snapchat may also ultimately become a next-generation TV platform, perhaps rivaling operators like Netflix, Inc. (NASDAQ:NFLX).
Yet the upcoming earnings report for Snap Inc is likely to be more about the short-term. And unfortunately, there are some potential landmines. If anything, the best approach may be to just stay on the sidelines.
So let’s take a look at a few reasons for this:
Issue No.1 for Snap Inc: The Tech Rally
The mega tech firms have staged a nice rally for the year. Just take a look at the following moves:
|Facebook Inc (NASDAQ:FB)||31%|
|Amazon.com, Inc. (NASDAQ:AMZN)||25%|
|Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL)||20%|
There are good reasons for the performance. These companies are top-notch companies that are gunning for secular growth opportunities.
Yet there are signs that the rally may be losing steam. After all, even though there have been strong earnings reports, the response from Wall Street has been fairly muted.
In other words, the same may be the case with Snapchat. Note that SNAP stock has already been rallying lately, up about 15% since mid-April. So even if there is a good report, it may not be enough, since investors may be focused on rotating to other categories that provide more value.
Issue No.2 for Snap Inc: Transition to a Public Company
This is never easy, even for seasoned management teams. But of course, SNAP CEO Evan Spiegel is only 26 years old and generally takes a low-profile with the media and analysts.
But of course, he will be under intense pressure on the earnings call. Hey, this happened with Mark Zuckerberg, who had a lackluster debut.
It’s also important to keep in mind that Snap Inc is a company in the early stages, having been founded in late 2011. What’s more, the monetization has only been in effect for the past few years. This means that there could easily be choppiness in the revenues, especially since the company’s core ad systems still need to be improved and retooled.
Besides, with the lofty valuation, which is at 65 times sales, there is little margin for error. Consider that the consensus price target on SNAP stock is $23.48, which implies only a 3% potential return for the next 12 months.
Issue No.3 for Snap Inc: User Base
This is perhaps the most important factor for SNAP stock. Unfortunately, the trend is not encouraging. The user growth rate went from a mere 7% in Q3 to only 3.2% by the following quarter.
Granted, the Snap S-1 pointed out that there were technical issues, such as with the Android app. Yet this may ultimately be mostly spin. Let’s face it, Zuckerberg has been focused on punishing Snapchat. A big part of this has been copying favorite features of the Snap app. While this may seem unfair, it appears to be working quite well.
Just look at Instagram, which has undergone an extensive transformation, with the key part of this being the Stories feature. In less than a year, it has attracted a whopping 200 million daily active users. Snapchat, on the other hand, has 162 million.
In a nod to this, here’s what Zuckerbeg had to say during his earnings report: “I think we were a little bit late to the trend initially around making cameras the center of how sharing works. But I do think at this point we’re pretty much ahead in terms of the technology that we’re building, and making an open platform I think is a big step forward. A lot of people are using these products across our family of apps. And I would expect us to continue leading the way forward on this from this point on.”
So if there is further weakness in the user base for the company in the quarter, there could be pain for SNAP stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.