It has been about a month since the last earnings report for Snap (SNAP). Shares have lost about 1.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Snap due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
SNAP Q4 Earnings Beat Estimates, User Growth Aids Top Line
Snap reported fourth-quarter 2020 earnings of 9 cents per share, which beat the Zacks Consensus Estimate for earnings by 28.6% and increased 200% year over year.
Revenues jumped 62.5% from the year-ago quarter to $911.3 million, beating the consensus mark by 7.6%.
Daily active users (DAU) at the end of the reported quarter were 265 million. Snap added 47 million DAU on a year-over-year basis and 16 million, sequentially. This growth was broad based with year-over-year and sequential growth in both iOS and Android platforms.
Geographically, revenues from North America (72.3% of revenues) soared 72.5% year over year to $659.2 million. Revenues from Europe (15.5%) jumped 54.1% to $141.6 million. Rest of the World (ROW) revenues were $110.6 million, up 27.1% year over year.
Average revenue per user (ARPU) increased 33.3% year over year to $3.44. On a year-over-year basis, North America and Europe ARPUs increased 62.7% and 39.4%, respectively while ROW declined 17.8%.
Snap’s fourth-quarter 2020 top-line growth benefited from increasing ARPU and user base growth.
User Engagement Improves in Q4
North America DAU increased 2 million sequentially to 92 million, up 6 million year over year. Europe DAU was 74 million, which increased 7 million on a year-over-year basis and 2 million on a sequential basis. ROW DAU was 99 million at the end of the reported quarter, up 35 million year over year and 12 million sequentially.
Snap is benefiting from improved user engagement. Notably, on average, Snapchatters opened Snapchat 30 times every day in fourth-quarter 2020. Snap launched the new Spotlight feature that allows users to share short-form videos publicly on its Snapchat app. Spotlight grew to over 100 million monthly active users in January.
Total daily time spent by Snapchatters over the age of 35 engaging with Shows and publisher content increased by more than 30% year over year. Markedly, digital native creator of sports and lifestyle content, Wave.tv reached an average monthly audience of 64 million Snapchatters.
Additionally, Snap launched the first Snap Kit integration with Twitter, enabling Snapchatters to easily share what’s happening on Twitter over the Snapchat camera on iOS, with Android soon to come.
Moreover, Snap launched a record 97 new international Discover channels in the fourth quarter.
Markedly, over 200 million daily active users engage with augmented reality every day on average. As of the end of fourth-quarter 2020, over 1.5 million augmented Lenses were created by the Snapchat community through Lens Studio.
Snap launched its first-ever 5G-enabled Landmarker Lens in partnership with Verizon. The Lens uses the company’s augmented reality technology and Verizon’s 5G Ultra Wideband capabilities to bring the soul band Black Pumas at the New York Public Library to life.
Snap added Cartoon Lens powered by real-time machine learning in the fourth quarter, which generated 1 billion impressions in its first three days after launch.
Additionally, the company released updates to Lens Studio, introducing new tools and workflows to better manage, create, and load Lenses, while adding capabilities for developers to build LiDAR-powered Lenses.
Further, the company partnered with NYX Professional Makeup, Ralph Lauren, Sweat, and The New York Times to launch augmented reality-powered advertising experiences. Additionally, Snap implemented a partnership with Perfect Corp. to enable more than 200 beauty brands to upload their catalogs to the Snap Camera for augmented reality try-on.
Moreover, the company partnered with Unity Software to extend the reach of Unity’s ads to Snapchat advertisers through the Snap Audience Network, as well as bring Snap technology to game developers through Snap Kit.
In addition to AR and content, Snap is also building new ways to empower creators, developers, brands, and others to improve the entire Snapchat experience.
The company partnered with TurboVote to launch a Snap Mini to help Gen Z and millennial audience register for the 2020 presidential election in the United States. Snap Mini helped register more than 1.2 million Snapchatters in the country to vote.
Snap’s Gen-Z Reach Drives Ad Growth
Snap is helping advertisers reach millennials and Gen Z audience who are more active on immersive mobile platforms like Snapchat. This popularity provides the company with a competitive edge over the likes of Facebook, Google and Twitter in attracting ad dollars.
In the United States, over 75% of the Gen Z population comprising 13-24 year olds watched Shows and publisher content in the quarter under review. Snapchat platform Snap is also growing rapidly in other international markets, such as India.
OnePlus (India) created Lenses for Diwali as a means to bring people together safely during the pandemic. Lenses garnered over 80 million impressions and reached over 14 million Snapchatters in India.
Furthermore, in markets like France and the UK, young people turned to Discover as their destination for premium mobile content, with more than two thirds of the Gen Z and millennial population in both markets watching premium content on Discover.
In the quarter under review, the cost of revenues on a non-GAAP basis increased 52.6% year over year to $377 million. Infrastructure costs, partner arrangement costs, and other expenses increased 15.9%, 153.4% and 45.5%, respectively, on a year-over-year basis.
Gross margin on a non-GAAP basis expanded to 59% from 56% in the year-ago quarter.
Operating expenses were $369 million, up 36.2% year over year. Sales and marketing expenses increased 29.2% year over year to $124 million while general and administrative expenses increased 28.4% year over year to $104 million. Research and development expenses rose 50% year over year to $141 million
Adjusted EBITDA was $165.6 million, up from $42.3 million in the year-ago quarter.
Balance Sheet and Cash Flow
As of Dec 31, 2020, cash and cash equivalents and marketable securities were $2.53 billion, compared with $2.72 billion as on Sep 30, 2020.
Net cash used in operating activities was $52.5 million compared with $66.8 million used in the year-ago quarter and $54.8 million cash used in the previous quarter.
Free cash outflow was $68.9 million compared with $75.9 million reported in the year-ago quarter and $69.5 million in the previous quarter.
For the first quarter of 2021, revenues are expected between $720 million and $740 million. Negative adjusted EBITDA is estimated to be between $70 and $50 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -40.44% due to these changes.
At this time, Snap has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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