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Social Media Platform Snap reported (NYSE:SNAP) announced earnings that beat expectations.

Investors will likely be happy with results that failed to show a hit from the Coronavirus, yet.

Snap also generated positive cashflow from operations for the first time, an important milestone.

The company did pull guidance, however, so investors should expect a year of more losses.

Revenue came in at $462 million, above consensus of $420 million.

Revenue growth of 31% was down from last quarter’s growth of 44%.

Adjusted earnings per share beat/missed estimates, coming in at a loss of -$0.08 compared to the consensus estimate of a -$0.07 loss.

Snap is doing an excellent job keeping up user growth, but profitability is another story. The market bid up the stock last year in anticipation of better profitability, yet now with the Coronavirus decimating ad spending, there are risks to owning this stock over the next 6-9 months in our opinion. 

Advertising spending has fallen hard due to the Coronavirus and Snap will likely struggle to maintain profitability this year in the face of such a weak business environment.

SNAP Has Been Hit Harder Than Peers Due to COVID-19

Snap continues to trade at a 20% multiple premium to peers including rapidly growing competitor Pinterest.

With such a premium multiple Snap has to continue putting up better and better profitability or else the stock is at risk of underperforming.

There’s 5% downside to the stock if Snap were to trade at the trendline for its level of growth instead of at a premium.

Recent concerns around COVID-19 and advertising spending have taken a bite out of Snap’s multiple.

SNAP Trades at a Multiple Premium to More Profitable Peers

Source: Y Charts

Snap had been improving the EBITDA loss rapidly in 2019, driving a rebound in the stock.

However, with the cratering of ad spending ongoing and Q1 a seasonally weak ad spending period, SNAP slid backwards this quarter generating another EBITDA loss.

EBITDA losses are expected to continue this year save for the historically strong holiday season.

EBITDA Losses Will Continue

Snap is accelerating the revenue it generates from each user but is still lagging the profitability of Twitter and Facebook when they were at the same stage of growth.

The market is pricing in a nice acceleration in per user revenue and if Snap doesn’t at least meet Twitter’s numbers, the stock has further downside to it.

Snap Profit Per User Still Has a Long Way to Go

Source: Company Filings, Dashed line is Grizzle estimates

 

About Author

Scott Willis

Scott has over 15 years of institutional investment management experience analyzing both debt and equity securities. He has held senior investment research roles at Credit Suisse, and TD Asset Management. His core areas of investment coverage at Grizzle include marijuana, energy and technology. Scott is a CFA charterholder and has been featured on Bloomberg, CBC, CNBC and Macleans.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.