Snap (NYSE:SNAP) reports earnings on Oct. 25 after the closing bell. Analysts expect the losses on Snap stock to continue. However, CEO Evan Spiegel has pushed a redesign of the site and added offerings that could improve Snapchat’s ability to generate revenue.
However, its past initiatives have either failed to gain traction or fallen to competition from Facebook (NASDAQ:FB). Indications have also surfaced that it might struggle with its core user base — teens. Given the site’s trials and its competition, I believe the upcoming reports will reinforce the concerns that have long surrounded Snap stock.
Analysts Expect Losses to Continue
Wall Street forecasts a quarterly loss of 14 cents per share. If this prediction holds, it will match the 14-cent-per-share loss seen in the same quarter the previous year. Analysts expect better results on the revenue side. They forecast third-quarter revenues of $283.2 million. If SNAP matches estimates, it will represent a 36.2% increase year-over-year. Snap reported revenue of $207.9 million in the third quarter of 2017.
SNAP More Focused on Monetizing Site
Despite the numbers, I do not see quarterly losses as the biggest concern for Snapchat stock. More than anything, investors will likely look for signs that SNAP has found ways to monetize Snapchat. Like Twitter (NYSE:TWTR) in recent quarters, Wall Street wants to see that the site can earn a profit.
In the past, signs indicated that SNAP had more closely followed the path of Myspace. In other words, it has become a site people use, but it holds little value from an investment perspective.
To Snap’s credit, it has admitted the need to make revenue a priority and tried to move away from this path. Mr. Spiegel has set a goal of achieving profitability in the upcoming quarter and realizing a full-year profit in fiscal 2019. It has also rushed a redesign of the Snapchat platform that will stress messaging.
The company has also created a program called Snapchat Storytellers that will link Snapchat influencers directly to brands. The next earnings report should give some indications on the performance of this program. SNAP has also created Snap Originals, its own content revolving around five-minute programs and six-second ads. Since this launched in October, investors will have to wait until January for revenue and earnings results related to Snap Originals.
Despite Efforts, SNAP Stock Will Struggle to Compete
Unfortunately, SNAP likely faces a more difficult path in monetizing its site than Twitter. Instagram, a site owned by the much larger and profitable Facebook, performs a similar function. Also, Facebook co-opted one of Snapchat’s best features by offering its own stories feature. Conversely, Facebook’s main site cannot co-opt Twitter’s features. It would either have to create a Twitter equivalent or destroy the strengths of the Facebook site to compete in this manner.
Moreover, Snap has been unable to make inroads outside of its core teen user base. This user base also does not command the buying power of the older, wealthier users who prefer Facebook or Twitter. Also, indications have emerged that teens may prefer Instagram in increasing numbers. Hence, SNAP faces pressure to work quickly to make its changes.
Consequently, Snap stock may offer the most reliable indicator of all. Snapchat stock trades slightly above its 52-week lows. At under $7 per share, it remains on the path of becoming a penny stock. Unless the earnings report offers evidence of a dramatic turnaround, I expect these concerns with Snap stock will continue.
The Bottom Line on Snap Stock
Given its history, I believe the upcoming earnings report for Snap stock will reinforce the concerns investors hold regarding the company. Consensus estimates indicate the company will report a loss of 14 cents per share for the third quarter. This would match a similar loss the company suffered in the same quarter last year.
More importantly, I think investors will focus on the company’s efforts to monetize Snapchat. This report should give the public its first view on the financial performance of Snapchat Storytellers. Wall Street will probably also receive further guidance regarding its profit goals in future quarters.
Still, given its competition and its past failures, I remain skeptical about Snapchat’s profit initiatives. Given that Snap stock trades close to 52-week lows, investors also remain skeptical. Regardless of what happens with past earnings, investors will probably read this report with a more future-oriented focus.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
