Earnings season continues in earnest, and one of the more interesting companies reporting this week is Snap Inc. (NYSE:SNAP). Snapchat's parent company has been a volatile and typically disappointing investment since going public 11 months ago at $17, and if it wants to bust through the broken IPO ceiling, it's going to need a stellar report when it steps up on Tuesday afternoon.
Snap seems to be settling into a groove these days. The stock is rising for the fifth time in the past seven months, but the shares are just about where they were when this string of upticks began in the low teens. There's going to be a lot riding on this week's report, and let's go over a few of the things that can go wrong.
1. History can unfortunately repeat itself
Earnings season has been hunting season with Snap shareholders as the prey. Snap has put out three quarterly reports as a public company, and each time the stock responded with a double-digit percentage plunge the next day.
$SNAP stock performance the day after posting earnings.— Rick Munarriz (@Market) November 9, 2017
Are you brave enough to own it for Q4?
Every losing streak can end, and maybe we finally see Snap stock rise on Wednesday. However, Snap is 0-for-3 in 2017, and the trend is clearly not its friend.
2. Acceleration and deceleration may continue
Slowing revenue growth isn't a surprise for young debutantes, especially ones packing the kind of octane that Snap had out of the gate. Snap has seen its year-over-year revenue growth decelerate for five consecutive quarters, and it won't be a shock to see that streak stretch to six on Tuesday.
The concern with Snap is the pace of the deceleration. The 1,255% growth it posted for the second quarter of 2016 at its peak was never going to be sustainable, but we've gone from 286% to 153% to 62% through the first three quarters of 2017. The last quarter was particularly troublesome, as analysts were holding out for 87% in revenue growth.
Wall Street's looking for $253 million for the fourth quarter, translating to a 53% gain on the top line. Investors are bracing for some deceleration, but if it falls woefully short again, it's probably going to be another dark trading day for Snap shareholders.
Things are going the other way on the bottom line, but that's not a good thing. Deficits are climbing. Reported losses have widened every quarter -- outside of the first quarter of last year when IPO-related hits inflated the red ink -- since mid-2015. Analysts finally see relief on that end by targeting $407.9 million in reported losses, but if the deficit widens again, we could see another post-earnings plummet out of Snap.
3. Usage trends can continue to disappoint
Snapchat growth has failed to keep up with Instagram, and how it holds up with daily active users on Tuesday afternoon could dictate the stock's direction. Snap closed out the third quarter with 178 million daily active users, just 17% ahead of where it was a year earlier and a mere 3% sequential uptick. Snap rightfully touts growing engagement and healthy gains in average revenue per user, but it has to make sure that its audience base doesn't stall or actually starts declining.
A redesign of the platform hopes to make Snapchat more intuitive, and Snap believes that it can grow in relevance by continuing to lead the way in innovative features. However, the redesign has been panned by some critics, and the competition is quickly copying what works at Snapchat. The real test will be user growth and how it fares in its monetization efforts, and we'll get quarterly reads on both fronts this week.