Social networking company Snap Inc. (NYSE: SNAP) has been on a roll amid the COVID-19 pandemic. It beat revenue estimates by a wide margin in Q2 FY 2020 as advertising sales rebounded, and its shares have dramatically outperformed the market thus far this year.
Investors will watch to see if Snap can continue that growth when it reports earnings for Q3 FY 2020 on October 20 after the market close.2 Analysts expect quarterly losses to widen on an adjusted earning per share (EPS) basis as revenue rises at a strong, but the slower pace, compared to the same quarter a year ago.
A key metric that investors will focus on is Snap’s Daily Active Users (DAU), a measure of user growth that helps determine how much the company is able to charge for advertising. Snap depends on advertising for nearly all of its profit and revenue. Analysts estimate that Snap will continue to grow its DAU in Q3 at a slower, but still strong pace, relative to Q3 2019.
In the last reported quarter, its subscriber growth — reflected by DAUs — increased 35 million on a year-over-year basis and 9 million sequentially.
Snap expects DAU between 242 million and 244 million for the third quarter of 2020, implying year-over-year growth of 15-16% or 32-34 million daily active users. The Zacks Consensus Estimate for global DAUs is currently pegged at 243 million.
Another important related metric is average revenue per user (ARPU), which reflects the average revenue generated by each user of the site or app. Together, DAU and ARPU present a picture of both the size of Snap’s user base and how successfully the company monetizes that base mainly through advertising. Snap needs to produce strong growth in daily active users to attract advertisers.
Snap’s daily active users have climbed steadily for the past five quarters after plateauing at between 186 million and 191 million users for six straight quarters ending Q1 FY 2019. Since Q2 FY 2019, Snap’s daily active user base has been at least 203 million. The company’s DAU growth accelerated YOY each quarter from Q2 FY 2019 through Q1 FY 2020.
The Zacks Consensus Estimate for third-quarter ARPU is pegged at $2.27, suggesting an increase of 7.1% from the year-ago reported figure.
However, bleak ad-spending environment due to the pandemic is expected to have negatively impacted Snap’s third-quarter top-line growth. Advertising has been the only source of revenues for this company, which has been facing significant competition from the likes of Twitter, Facebook, Google and Pinterest for ad dollars.
Snap LONG (Buy)
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