Snap Inc (NYSE:SNAP) stock has tanked following its latest earnings release. Is this a buying opportunity?
Shares of California-based Snap Inc (NYSE:SNAP) have fallen off a cliff following its latest earnings release last week. Snap shares have tanked, falling by a massive 14% in a single trading session. Further, if you look at the technical chart for Snap, the stock looks oversold, which could encourage a buying decision. However, the stock is a risky bet on account of the growing risks, which we will discuss in detail. Further, today, the 14th of August marks the second lockup expiry this month, and since Snap's blackout period for employees ends today, the stock could get hit by a surge in sell volumes. Investors would do well to stay away from the stock in the near term.
Snap Has Reported Poor Results.
Snap Inc, the company that runs the popular social media app, Snapchat, reported worse than expected second quarter results on Thursday, last week. Snap registered a loss that was deeper than expected, even as revenue missed estimates, again. The company also added fewer users than analysts expected. All in all, the earnings release disappointed investors on nearly every front. Snap added 7 million Daily Active Users (DAUs) during the quarter, which translated to even slower user addition than what it reported in its first quarter. Snap added approximately 8 million DAUs during Q1 this year, and the latest numbers could hurt the growth trajectory for Snap, since it's basically an advertising platform. Although it does sell hardware in form of its augmented reality glasses dubbed 'Spectacles', this revenue is still not enough to make a huge impact on its overall revenue growth.
Snapchat's sluggish user growth stands in stark contrast to user addition on Instagram. The platform, owned by Facebook, added its latest 100 million Monthly Active Users (MAUs) in approximately 3-4 months, while taking the number of 'Stories' users past 250 million. That's way bigger than Snap's user base of 173 million DAUs. Stories is a feature Facebook reportedly copied from Snapchat. However, the former has been successful in leveraging the feature on WhatsApp, Facebook and Instagram.
Coming back to the headline numbers, Snap has missed revenue estimates for the second time in its short life as a publicly listed company. Snap has failed to meet expectations in two out of two earnings releases post its IPO. Snap's adjusted (non-GAAP) Earnings Per Share (EPS) recorded a 16 cents loss, which was worse than the expected 14 cents a share. Meanwhile, revenue came in at $181.7 million, falling slightly short of the expected $186.2 million. Revenue grew by 153% over $71.8 million, which it reported in the same quarter last year. It's also worth noting that these expectations had been revised downwards by analysts on multiple occasions. And the fact that Snap still missed on those expectations is a little worrying.
Further, with DAUs coming in at 173 million, lower than the expected 175 million, concerns persist that Snap may not be able to sustain the current pace of growth. According to FactSet, Snap's Average Revenue Per User (ARPU), a good measure of monetization, also disappointed the street, coming in at $1.05 per user, lower than expectations of $1.07.
Snap Stock Lockup Expiry Today.
The problem for Snap shareholders is that Snap's second quarter results are closely followed by the second, and bigger lockup expiry this month. About 400 million shares became available for trading about two week ago. However, the impact on stock price so far is likely to have been muted, given that Snap employees were in the middle of a blackout period prior to and post the earnings announcement. On August 14th, today, another 782 million shares will become available for trading. And coincidentally, today is also the day the blackout period ends. So, watch the stock closely over the coming weeks. Since the stock has tanked already, it's possible that those looking to sell shares may do so in a staggered manner, implying that there may not be a massive fall immediately. However, this could lead to an extended bear phase. Snap has also been excluded from its indices by S&P, which is another thing investors should keep in mind. In the absence of support from index funds and ETF, Snap has further worsened its position by choosing to issue shares with no voting rights at all. All in all, investors would do well to stay away from the stock for now.
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