By Emily Bary
Snap Inc.’s stock was once Wall Street’s “punching bag,” but now the social-media company is in the middle of a turnaround that may only get better in the next earnings report.
“We believe that Snap /zigman2/quotes/205087158/composite SNAP +1.46% is on the verge of writing its own ‘Cinderella story’ due to the likelihood of a massive upside surprise in [daily-active-user] growth” in the second quarter, wrote MoffettNathanson analyst Michael Nathanson. His research indicates that Snap has seen daily active users (DAUs) grow by 15 million since March, meaning that the company could be in for a “blowout” earnings report.
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Nathanson upped his yearly DAU estimates to 223 million in a note to clients Monday, while also boosting his 2019 revenue estimates by 5%. He argues that new Snapchat filters and games, as well as a redesigned Android app, seem to be generating “incredibly strong” engagement.
Snap shares have already climbed 160% so far this year, and the stock’s valuation is one reason why Nathanson is maintaining his neutral rating, even as he predicts that the company is seeing strong momentum. Nathanson also worries that Wall Street is overly optimistic about Snap’s operating leverage, since he estimates that the company “has to pay variable per user hosting costs that are nearly equivalent to the [average revenue per user] that is generated from non-U.S. users.”
In Nathanson’s view, that means Snap is only breaking even on new users it picks up overseas.
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“We believe investors looking to short the stock should stay clear of what could be jaw-dropping results in 2Q 2019,” he wrote. “However, after those earnings, we believe the market will begin to question if Snap’s record success this quarter is a lasting trend or just a temporary fad.” Nathanson wonders how often Snap can “pull off such captivating products like the Baby Face filter that breaks through the cultural zeitgeist.”
Snap shares are up 2.7% in premarket trading Monday, and they’ve gained 26% over the past three months. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.07% has risen 2.6% in that time.