Has Snap Bottomed? Today's Q4 Earnings Results Could Provide The Tell

Trading at $6.94 as of yesterday's close, shares are down more than 67% since their high of $21.22 during February 2018. The company was hurt by too many management missteps that sapped investor confidence in the future of the company’s photo-sharing app, Snapchat, even though it remains popular among teens and the celebrities they follow.

The biggest miscalculation that the CEO and co-founder Evan Spiegel made during the past year was the vaunted redesign of the app. Unfortunately, once it was unveiled, the move didn’t resonate well with existing users. Worse still, it didn't improve overall engagement, which was the primary rationale behind the effort.

Then came the departure of top executives, giving the impression the company’s turnaround is failing to convince key players within the management team. In October, Chief Strategy Officer Imran Khan left the company; content chief Nick Bell left in November; last month it was Chief Financial Officer Tim Stone, who resigned after just eight months in the job.

When Snap reports fourth quarter earnings after the market close today, the most important metric to monitor will be the user engagement number. We don’t expect the company to show an impressive turnaround on that front, given the tough competition it’s facing from Facebook’s (NASDAQ:FB) Instagram along with too much internal instability.

Even if we assume that Spiegel will, at some point, overcome the challenges posed by the redesign as well as the company's internal strife, we still find it difficult to imagine a real future for this app. After all, it has to compete with Facebook, a powerful rival with deep pockets and a very strong relationship with advertisers.

Indeed, advertisers can find the same users at Instagram. Unfortunately they're Snap's bread-and-butter. While Snap is struggling to stop a decline in its daily active users, there were 500 million daily active users for Instagram Stories in Q4. Just six months earlier, in June 2018, that figure was 400 million.

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Snap's outlook isn't as promising. The number of daily active users on Snapchat fell to 186 million in Q3, a second straight quarter of declines. According to company guidance that number is expected to fall again in Q4.

That being the case, we believe advertisers have less incentive to spend their dollars on Snapchat where they’re unlikely to target a bigger audience. While announcing Stone’s departure last month, the Los Angeles-based Snap also said it expects to report quarterly results for sales and earnings before interest, taxes, depreciation and amortization (EBITDA) that are "slightly favorable to the top end" of previous forecasts.

In October, the company projected fourth quarter revenue of $355 million to $380 million. Analysts on average expect a loss of eight cents a share on sales of about $376 million.

Bottom Line

Even after all the blunders in 2018, Snap has still failed to show that it’s on the right track to improve user engagement and overcome its internal challenges. The company must quickly show that it’s winning on these fronts before we'd be comfortable saying its shares have seen the worst and are finally a good buy.

We're skeptical that will happen today. As such we don’t think now is the time to move off the sidelines on this stock.