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2 Reasons Earnings Season Might Burn Snap Stock Investors

By Rick Munarriz - Jul 23, 2019 at 8:05AM

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Snapchat's parent company is hot, but that hasn't usually been the case when it reports financial results.

One of the more volatile performers during earnings season is swinging away in the on-deck circle. We'll find out soon if Snap ( SNAP -2.34% ) hits it out of the park or goes down swinging: It reports its second-quarter results shortly after Tuesday's market close. The only near-certainty is that it will be feast or famine for Snapchat's parent company. Snap doesn't settle for a bunt single.

Analysts see another period of solid top-line growth at Snap. Revenue is expected to clock in at $359.6 million, a hearty 37% advance over the prior year's showing. Strong bursts in revenue have been the norm for Snap. Despite Snapchat's poorly received Android app update that rolled out in late 2017 and last year's subsequent stall in user growth, Snap has never posted top-line growth of less than 36%. Snap is getting better at monetizing its platform.

Things have been looking up for Snap lately, but it doesn't mean that the coast is clear heading into this week's financial update. Let's go over the two reasons why investors could be nervous this time around.

A woman on her smartphone walking in front of a Snapchat billboard.

Image source: Snap Inc.

1. Snap stock typically slides after earnings

We now have nine quarters of data since Snap went public. It's always swinging for the fences, but it has only two homers on its stat sheet. Here's how the stock has performed the day after reporting quarterly results.

  • Q1 2017: Down 17%
  • Q2 2017: Down 10%
  • Q3 2017: Down 18%
  • Q4 2017: Up 37%
  • Q1 2018: Down 24%
  • Q2 2018: Down 3%
  • Q3 2018: Down 8%
  • Q4 2018: Up 32%
  • Q1 2019: Down 6%

The stock has moved lower in nine of its 11 quarters as a public company, and if you take a closer look, you'll see that the fourth quarter has been the only winning quarter. It could be just a coincidence, but since this isn't the fourth quarter again, it's a good enough reason for investors to worry.

Snap stock doesn't need a bad report to sink. April's first-quarter results seemed solid at first glance. Revenue was stronger than expected. Its deficit narrowed. Its once problematic usage trends inched in the right direction. The stock initially opened higher, only to close out the trading day lower.

2. The stock has had a monster 2019

Snap stock went from being a freshman failure in 2017 to falling into a sophomore slump in 2018. Investors have been singing a different tune in 2019. The stock has soared 157% this year, making it the third-largest stateside-listed stock to have more than doubled in 2019.

Momentum is a good thing when everything is going right, and that appears to be the case for Snap. Analysts have been buying into the turnaround story, excited by Snapchat's growth prospects as it finally fixes its Android app and dives into new engagement-enhancing features in content, filters, and mobile gaming.

Investors have high expectations with all of the air beneath the shares in 2019. Beating expectations wasn't enough last time out, and it remains to be seen how many more daily active users than the 190 million it had under its belt at the end of March will be required for the stock to keep moving higher. Snap has earned the market's attention, and now it will have to keep it that way as the next pitch crosses the plate.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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