Snap stock tanked last night after the company posted a net loss of more than $2 billion, although it still managed to hold on and stay just above its IPO price. It’s certainly no surprise that the Snapchat parent had expenses related to the initial public offering, but that huge net loss has turned more than a few heads. Nearly 73 million shares of Snap stock have already changed hands, and it’s not even noon yet. The average daily volume is only 14.47 million shares, according to Google Finance.
The great GAAP debate
Snap’s first earnings report comes at a time when the major trend among tech companies is to shift from a primarily non-GAAP-focused model to one focused on GAAP numbers. The shift has come gradually over the last year or two as tech companies have gotten blasted for the big differences between their GAAP and adjusted numbers and investors were repeatedly advised to “mind the GAAP.”
Stock-based compensation has been the heated part of the debate as names like Twitter lose piles of money while awarding stock to key executives. Snap suddenly makes Twitter look like a saint, however, given that the vast majority of its net loss was due to stock-based compensation. But when you drill down even further into the numbers, you see numbers that would make most accountants wince. Meanwhile, CEO Evan Spiegel was calm, collected, and the picture of hubris on the earnings call.
Snapchat fails to add enough users to calm fears
As expected, the daily active user base was the major focus of last night’s earnings report — after rolling one’s eyes at the $2 billion loss. The Snapchat parent added 7 million net new daily users, but as Barclays analyst Ross Sandler noted, that wasn’t enough “to disprove the ‘Facebook is crushing Snapchat’ thesis.” Specifically, Snap added 3 million users in North America and Europe, which is consistent with recent past quarters, but he noted that the Rest of the World didn’t recover from the weakness noted in the fourth quarter due to the technical problems with Android
As a result, he remains on the side-lines with an Equal-weight rating and $18 price target on Snap stock. However, he added that he’s “getting more interested” thanks to the selloff and because “the market is starting to discount a lower bar for future execution.” He also likes the “long-term backdrop for SNAP’s innovation and overall potential.”
On the other hand, Sandler appreciated that engagement continued to pick up as the average daily user spent more than 30 minutes per day and daily sessions increased from 18, which was recorded in the company’s S-1. Revenue almost quadrupled year over year and has begun to scale, while hosting cost per daily user fell sequentially. Sandler found this to be a big positive because of the ongoing inflation in hosting costs over the last few years.
Snap stock price targets cut
Multiple firms slashed their price targets for Snap stock in the wake of last night’s earnings report. Nomura analyst Anthony DiClemente cut his target from $16 to $14 and reiterated his Reduce rating on the shares. Like Sandler, he noted that engagement among Snap users is growing, but he added that monetization isn’t doing the same.
In his view, the biggest miss was average revenue per user, which fell 14% sequentially to 90 cents, although he had been expecting the metric to be flat. Management said seasonality and events like the Olympics and the U.S. election had an impact, but DiClemente was surprised at the magnitude because he feels a company as early in its growth cycle as Snap is should be immune to broader factors at this stage.
Bank of America Merrill Lynch analysts cut their price objective on Snap stock to $23 and reiterated their Neutral rating, while Stifel cut their target from $22 to $15 per share. JPMorgan’s price target for Snap stock moves from $24 to $20 per share, while Deutsche Bank’s target was cut from $30 to $23.
Bulls come to Snap’s defense
Snap stock has been polarizing since before the IPO, but it wasn’t until after the offering’s underwriters were allowed by law to weigh in that the lines were so clearly drawn. Even still, many of the biggest investment banks are trying to defend the company, like Goldman Sachs and Morgan Stanley, both of which served as underwriters.
Goldman was unmoved, leaving its price target for Snap stock at $27. Credit Suisse analyst Stephen Ju reiterated his Outperform rating and $30 price target on Snap stock, declaring that “the long-term investment thesis is not an ephemeral thing.”
He expected the positives, which he named as monetization in North America and leverage in hosting costs, to be overshadowed by the misses on revenue and daily active users, “as this was certainly NOT in the script for its first report as a public company.” He added that while he would have preferred to see higher user numbers and a higher reset on his revenue and adjusted EBITDA estimates, but he’s settling for “profit dollars” and hasn’t changed his long-term investment thesis.
