After a rough start on Wall Street, Snap Inc. (NYSE:SNAP) has actually done alright over the past several months. Although SNAP stock still trades below its $17 IPO price, it is up about 33% since its last post-earnings sell-off below $12 in August.
But there really hasn’t been much in the way of material news that warrants this 33% move higher. The company has won some video content deals, got a nice read on teenager popularity from Piper Jaffray’s Taking Stock With Teens survey and the stock has been upgraded by a few analysts on Wall Street.
But the overarching bearish narrative remains in tact. Ad growth estimates for Snap have come down, Instagram continues to ramp up (the platform crossed 800 million monthly users in September) and the sentiment on Wall Street remains largely bearish (average price target is below the current stock price).
Because of this, investors should be nervous ahead of Snap’s third-quarter-earnings report, which is due out next week. The overall narrative remains the same as last quarter (declining ad revs, skyrocketing costs, and intensifying competition), but SNAP stock is up 33% since then. This isn’t a “valuation bounce” since the valuation isn’t that cheap, so it is a bounce predicated on the fact that things have gotten better at Snap.
Maybe they have. But it doesn’t look likely, and that makes the risk-reward look terribly unfavorable for longs ahead of third quarter earnings.
What Will Snap’s Earnings Look Like?
I have stated for a long time that if SNAP stock is going to follow in the footsteps of Facebook Inc (NASDAQ:FB) and inflect massively upward after a rough start on Wall Street, then Snap needs to report a thesis-changing quarter.
I don’t think investors will get that in this report.
There is hope because Twitter Inc (NYSE:TWTR) sky-rocketed higher on its quarterly earnings. But that was more the result of company-specific cost-saving than anything else. Overall, this quarter’s Twitter narrative looked a lot like the previous quarter’s narrative, just with higher margins. Ad revenues still fell back. Monthly user growth was still unimpressive. As was daily engagement growth.
You can’t really extrapolate higher margins and good cost-cutting at Twitter and say that will happen at Snap. But because these two companies are in the same digital advertising space, you can extrapolate the fact that Twitter’s top-line narrative didn’t change this past quarter, and therefore Snap’s top-line narrative likely also didn’t change this past quarter.
There is data out there to corroborate this thesis.
Instagram crossed the 800 million monthly user growth mark in September, indicating that the IG ramp-up narrative is still intact. The big driver of that ramp-up narrative is Stories. That means the ramp-up narrative is coming at the expense of Snapchat.
Because of this Instagram ramp, eMarketer lowered their estimates for Snap’s ad revenues this year. Their estimate now stands at just $642.5 million. It was at $770 million in March and $805 million in July 2016. Not surprisingly, eMarketer expects Instagram to widen its ad revenue lead over Snap over the next several years.
All in all, it doesn’t look like much has really changed in the digital advertising world over the past several months. Not only did Twitter’s ad revenues continue to decline and Instagram continue to ramp, but Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) just reported its strongest advertising revenue growth rate so far this year. Clearly, the titans of the industry are expanding their dominance at the expense over the smaller players.
That isn’t good for SNAP.
Bottom Line on SNAP Stock
Overall, there isn’t much data out there supporting the hope that Snap is going to report some sort of thesis-changing quarter that will send the stock on a FB-like trajectory. Snap might one day report that quarter, but it won’t be next week.
With SNAP stock up 33% since its post-earnings low in August, there is clearly a healthy amount of good news priced into the stock ahead of Q3 earnings. High expectations on a drab fundamental backdrop make for a dangerous situation for longs.
As of this writing, Luke Lango was long FB.
