Snap Inc. (NYSE: SNAP) recently received a vote of confidence from Morgan Stanley, which upgraded the stock to “equal-weight” from “underweight” and increased the price target to $16 from $12.
This adjustment reflects a 10% upside potential based on the firm’s improved outlook for Snap’s advertising business and a more balanced valuation relative to its peers.
Morgan Stanley’s analysts pointed to enhanced advertiser engagement and forthcoming improvements to the app’s install offerings as key drivers behind the stock’s new rating.
SNAP’s Q2 earnings preview
Looking ahead to the Q2 2024 earnings, Snap is expected to announce its results on August 1, 2024, with a forecasted GAAP EPS loss of $0.16 per share, which would be an improvement from the $0.24 per share loss in Q2 2023.
Revenue expectations are set at $1.25 billion, up from $1.07 billion a year ago.
The company has seen a positive trend in analyst revisions, with 15 upward adjustments in the last 90 days, signaling a bullish sentiment on Wall Street regarding Snap’s near-term financial outlook.
Financial analysts are keen on Snap’s ability to maintain its revenue momentum, especially given its robust growth in user engagement and diversification of revenue sources.
The upcoming Q2 earnings will be crucial in evaluating whether Snap can sustain this growth trajectory, particularly in light of its guidance which projects revenue between $1.225 billion and $1.255 billion, with adjusted EBITDA expected to range from $15 million to $45 million.
Snap’s Q1 2024 earnings surpassed expectations, reporting non-GAAP EPS of $0.03, which beat estimates by $0.08, and a revenue of $1.19 billion, up 20.3% year-over-year.
The stock experienced a significant 24% rise following these results. Key growth metrics included a 10% increase in daily active users (DAUs) to 422 million and a more than doubling in time spent on Spotlight content.
Additionally, Snapchat+ subscriptions tripled year-over-year to over 9 million users, indicating robust growth in this revenue segment.
Snapchat+ contributing big to bottomline
Snapchat+ has been a transformative element for Snap, initially launched to offset mounting machine learning (ML) costs and provide a steadier revenue stream against the fluctuating ad market.
This subscription service has become a cornerstone of Snap’s revenue diversification strategy, contributing significantly to its bottom line.
As of Q1 2024, Snapchat+ contributed approximately 7% of Snap’s total revenue, demonstrating the success of this premium offering.
Is SNAP undervalued?
Although traditionally valued on revenue, if we consider Snap’s forward earnings, the improvement in EPS to $0.03 in Q1 from a loss in the previous quarters indicates a shift towards profitability.
This enhancement in profitability, if sustained, could lead to a re-rating of the stock.
Based on the current revenue and the stock price data, Snap trades at a Price-to-Sales (P/S) ratio significantly below that of its competitors like Meta and Google.
This could indicate that Snap is undervalued compared to peers, especially given its recent growth rates and the success of Snapchat+ in contributing to a more stable revenue stream.
From a broader market perspective, Snap’s strategic initiatives, including enhanced advertising platforms and a growing emphasis on augmented reality (AR), are pivotal.
These efforts are intended to drive future revenue growth and improve profitability margins. As Snap continues to innovate and expand its product offerings, the company’s financial health and stock performance will likely mirror these developments.
As we transition from this fundamental analysis to a technical perspective, it’s essential to consider how these developments will influence Snap’s stock trajectory.
With Morgan Stanley’s recent upgrade serving as a positive signal, the next step is to delve into the charts to assess potential movements in Snap’s stock price.
Expect volatility during earnings release
After a strong over 100% surge in the fourth quarter of 2024, Snap’s stock performance has been highly dependent on its quarterly results.
It dropped close to 35% after reporting its Q4 2023 numbers and surged more than 25% after reporting its Q1 2024 numbers.
SNAP chart by TradingView
The stock has faced tremendous resistance whenever it has tried to trade above the $17.7 mark this year and has found support multiple times near $14.4, close to where it is currently trading.
Considering that and the high volatility the stock has exhibited, one shouldn’t carry an outright long or short position going into Q2 earnings.
Traders who want to play the earnings trade must use Snap’s Call or Put options expiring on August 2 to do so.
Investors who want to take long-term positions in the stock must buy it only if the stock gives a weekly closing above $18.
The post Morgan Stanley upgrades and hikes SNAP’s price target to $16: Is it a Buy ahead of Q2 earnings? appeared first on Invezz
