Snap (SNAP -1.14%) is scheduled to report fiscal 2022 second-quarter earnings after the markets close on Thursday, July 22. The social media company faces headwinds that are causing revenue growth to slow. These include privacy policy changes from Apple (AAPL 1.00%) that make it more challenging to sell targeted advertising, a slowdown in advertising demand amid the Russian invasion of Ukraine, supply shortages, and rising inflation.
Management already gave investors a mid-quarter warning that the period was progressing considerably worse than expected. Shareholders will want to pay close attention to see if Snap's quarter worsened further after it updated investors on May 23.
Snap to miss the lower end of guidance
On that day, the company informed the market that macroeconomic conditions had worsened quickly since it issued projections on April 21. They added that those forces would likely cause Snap to miss even the lower end of its revenue and profitability forecast for the second quarter. With its first-quarter earnings, management said revenue growth in the second quarter would be in the range of 20% to 25% at the midpoint. Meanwhile, it said adjusted earnings before interest, taxes, depreciation, and amortization would fall between breakeven and $50 million.
Management then tried to reassure investors by saying, "We remain excited about the long-term opportunity to grow our business. Our community continues to grow, and we continue to see strong engagement across Snapchat and continue to see significant opportunities to grow our average revenue per user over the long term." But the latter statement had little effect as the stock crashed following the warning.
Fortunately, Snap is starting from a brisk pace of growth. In its most recent quarter, which ended on March 31, revenue increased by 38% from the same quarter in the prior year. Even if the headwinds mentioned above pull down this growth rate, it could remain above double digits while it adjusts the business to counter these forces.
The company's app is free to join and use, so it has little to lose from a customer's standpoint as inflation pinches purchasing power. On the contrary, folks may look to the social media app as a lower-cost (free) alternative form of entertainment as prices rise for fuel, movie tickets, and concerts. However, marketers may be willing to spend less to gain the attention of consumers who are themselves less inclined to spend money.
Snap boasts 332 million daily active users, up 13 million from the previous quarter. Impressively, the company has sustained user growth despite the economic reopening, which has created more options on what folks could do with their time.
What this could mean for Snap investors
Analysts on Wall Street expect Snap to report revenue of $1.14 billion and a loss per share of $0.01. If the company reaches those projections, it will mean a revenue increase of 35.4% from the same period a year before. Meanwhile, earnings per share (EPS) would turn negative after it reported a positive $0.01 in the same quarter last year. Interestingly, analyst estimates for revenue growth of 35% seem overly optimistic, considering management already said revenue growth would be below the lower end of its guidance (20% for Q2).
SNAP Price to Free Cash Flow data by YCharts
Snap's valuation is down but is still expensive on an absolute basis with a price-to-free-cash-flow ratio of 106. Investors will want to steer clear of this investment until it puts the headwinds behind it or its valuation becomes more favorable.
