Why Snap's Post-Earnings Slump Is Not The Pullback To Buy

Investors were disappointed with Snap Inc SNAP’s quarterly misses in sales and earnings per share, but the stock has more than half recovered from a 13.4-percent post-earnings plunge.

“The market has baked in enormous growth for Snap Inc.,” Argus analysts wrote Tuesday, attributing the value drop to management’s “failure to match lofty growth expectations.” The critical metric of daily active users surged 18 percent annually and 5 percent sequentially, but growth slowed well below what Snap achieved as a private firm.

Argus, which warned that “the stock may not have found a floor given widespread skepticism,” reiterated its near-term Hold and long-term Buy ratings nonetheless.

“We would be inclined to use non-fundamental weakness, such as a broad market pullback, as an opportunity to upgrade SNAP shares – but only assuming a more vibrant operating performance,” the firm wrote. “Although the shares have fallen 50% since our March 2017 initiation, we are less inclined to upgrade amid the company’s current challenges.”

Snap’s struggle is partly rooted in the cost to differentiate its product from Facebook Inc FB’s competing Instagram platform. Snap’s GAAP (generally accepted accounting principles) loss of $433 million, which is four times the loss of last year’s comparable quarter, affirms this challenge, Argus wrote.

Treading Water

Still, Snap is making progress in other critical categories.

Management reported increased spending from second-quarter advertisers, who included more than 75 of Ad Age’s top 100 national advertisers. At the same time, it doubled the percentage of ads delivered through the firm’s application programming interface, making good on its goal to automate the ad service.

At the same time, Argus considers the firm’s average revenue per user growth, particularly outside North America, a “healthy sign” of continued advertiser support.

“Snap appears focused on growing the monetization of its existing base, rather than on growth for growth’s sake,” the analysts wrote. “But with deep-pocketed rivals growing faster, and GAAP losses widening, investors’ patience with this one-time market darling has grown thin.”

At the time of publication, Snap was trading up 1.5 percent at a rate of $12.78.

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