Snap's Q4 earnings blew everyone away, but here's why Wall Street remains sceptical about its future
- Snap blew past Wall Street expectations with bumper revenue and daily active user growth. Stock shot up as much as 30% in after-hours trading.
- But this is the first quarter in the entire year Snap hasn't missed expectations, and analysts are still sceptical about its long-term prospects.
- In a note to investors, Pivotal analyst Brian Wieser cast doubt Snap's long-term ability to compete with Google and Facebook, its corporate management, and its costs.
Snap blew past Wall Street expectations in a major way on Monday, reporting stellar user growth and revenue for the final three months of 2017.
Here's a quick recap of its Q4 earnings:
- Revenue: $285.7 million (£205 million), up 72% year-over-year and above the $252.8 million (£181 million) expected by analysts.
- Daily active users: 187 million, up 5% from Q3.
- EPS/Net loss (adjusted): ($0.13) vs. ($0.16) expected.
Snap's stock rose as much as 30% in after-hours trading, buoyed by the bump in advertising revenue in the run-up to Christmas.
The results are a big deal for Snap. The company missed Wall Street expectations for the previous three quarters straight, with the stock cratering every time there's been an earnings report.
Although the daily user metrics show Snapchat boasts a loyal base willing to return to the app every day, it's being walloped by copycat features on Facebook-owned Instagram.
Take this chart, which compares daily users for Instagram's Snapchat-style Stories feature, and Snapchat itself:
Fierce competition is just one reason why Wall Street analysts remain sceptical about Snap, even after its strong earnings.
Pivotal held its "Sell" position for Snap, writing in a note to investors that its "long-term view [is] unchanged." It was not alone - in a brief note after Snap's earnings, UBS also maintained its "Sell" position.
Pivotal analyst Brian Wieser wrote:
"Snap reported good 4Q17 results vs. expectations, with revenues above forecasts. However, we did not hear any commentary nor observe any data which causes us to meaningfully alter longer-term variables in our model. Our price target remains $10 per share on a YE2018 basis, which continues to lead us to rate the stock Sell."
On the positive side, Wieser noted that Snap managed to attract smaller advertisers en masse for the first time.
Buyers outside the AdAge 100, a US index of the top national advertisers, made up more than half of Snap's revenue. Diversification in advertising is a good thing, and bodes well for Snap's long-term prospects.
But there's also a downside, because it suggests big, blue-chip brands - the ones with all the advertising cash - might be slowing down their spend.
"[We] can infer this result at least partially reflects some degree of deceleration in spending from large brands, which generally view Snap as a niche platform rather than something core to their typical campaigns," wrote Wieser.
There's some subtlety to this, however. Of the blue-chip brands that did start putting money into Snapchat in 2017, 90% spent money every quarter, suggesting they were happy with the results.
Still, being a niche advertising platform, rather than a valid third player to Google and Facebook, is a rut Snap can't seem to extricate itself from.
Fears over Snap's cost base and corporate governance
Wieser also worried about Snap's high expenses and costs, and the firm's corporate governance.
"Costs were high, as generally expected, but not quite as high as we forecast for this quarter," Wieser wrote. "This can be viewed positively to a degree, but only to a degree: Costs other than stock-based compensation amounted to 162% of revenue in the quarter and 200% of revenue for the year."
Some of Snap's costs are down to its hosting deals with Amazon and Google. Those expenses would be worth it if Snapchat exploded in growth - but that hasn't quite happened, and the hosting costs are still expensive. As Wieser noted, overall hosting costs were up 16%, though the cost per user fell 3%.
"Management is effectively entrenched, and shareholders are entirely disenfranchised because Snap's publicly traded shares lack any voting rights," he added.
Snapchat upset potential investors back in February when it told them they would have no say in the running of the company, with founders Evan Spiegel and Bobby Murphy maintaining control.
For Wiesel, this is particularly worrisome because there are no grownups in the room. Snap's management team lacks experience "transforming a successful new product into a successful company," he said.