Does the Snap stock price have room for improvement after Q4 earnings?

Snap [SNAP], the social media company behind Snapchat, is expected to report a 30.83% rise in year-over-year revenues but flat earnings when it releases its fourth-quarter figures on 3 February.

Analysts polled by Zacks Equity Research forecast that the company will report revenues of $1.19bn and earnings per share of $0.09. 

The blow to Snap’s profitability is partly due to Apple [AAPL] changing its iOS privacy features last year to require explicit permission to collect and share user data, making it more difficult for platforms like Snapchat to offer targeted advertising and pricing.

Snap’s chief business officer Jeremi Gorman also warned that supply chain squeezes and rising costs were hitting revenues, resulting in a reduction in marketing spend.

Snap stocks were under pressure

The iOS changes and supply chain issues have weighed on the Snapchat share price, which has also faced headwinds due to the switch in the market from growth to value amid concerns of higher inflation and potential interest rate hikes.

The Snap stock price has had a difficult start to 2022, reaching a 52-week low of $28.02 on 24 January. Though it has since risen to reach around $34 at the pre-market on 2 February, the Snapchat stock price has dropped 36.4% in the past 12 months...

In comparison, shares in its rivals Facebook [FB] and Google’s parent company Alphabet [GOOGL] have risen 21.2% and 48.1%, respectively, over the same period.

The Snap stock price could drop even further following the December quarter results, which mark a slowdown from the 57% revenue surge it recorded in Q3 and the 116% leap in Q2.

How did Snapchat perform in Q3?

In its third quarter Snap reported revenues of $1.07bn, up 57% but missing out on analysts’ expectations of $1.10bn. Its earnings per share of $0.17 beat forecasts of $0.08. The Snap stock price dived 27% after the Q3 announcement on 21 October.

Snapchat’s daily active users climbed 23% year-over-year to 306 million, exceeding the forecast 301.8 million that could have provided some relief to the Snap stock price, However, its average revenue per user came in at $3.49 ­— lower than expectations of $3.67.

The group said new augmented reality lenses, personalised services and Snapchat trends for advertisers built around keywords and use of digital avatars helped build demand. The impact from the demand will affect the Snapchat share price in the year ahead.

However, Snap added that fourth-quarter revenues are expected to come in between $1.16bn and $1.20bn, short of the $1.36bn forecasted. This was mainly down to supply chain issues.

“Unfortunately, these changes are occurring at a time when we would otherwise expect peak advertising demand to drive peak contestation, and therefore peak pricing, in our auction,” said CFO Derek Andersen.

AR and metaverse offer growth potential for Snap stock

Analysts polled by CNN expect Snap to post revenues of $1.2bn and an earnings loss of $0.09 per share.

Despite the headwinds of supply chains and iOS changes, Snap is expected to once again record strong user number growth. According to TipRanks analysis of website traffic, Snap’s monthly growth in December for unique visitors rose 52.5% year-over-year to 26.2 million. Unique visitors to snapchat.com across all devices in Q4 rose 24.3% to 68.6 million. As a growth company the Snap share price has been closely linked to subscriber addition.

Investors will eye development in Snap’s augmented reality offerings. It recently set up an AR lab to help clients build immersive experiences for users and its AR lenses are proving popular in the fashion world as a way to virtually try on items of clothing. Analysts see potential in the Snap stock price going forward based on the role it could play in the evolving metaverse.

It has also renewed deals with media groups such as Disney to show programming to Snap users and help boost ad sales.

The Snap share price could plunge further if it misses forecasts and paints another gloomy forecast for the Q1 update.

According to Market Screener, analysts have a consensus ‘buy’ rating on the Snapchat stock and an average target price of $64.39. That is almost double the $33.66 it reached at the close on 1 February.

Loop Capital analyst Alan Gould echoes this optimistic outlook. Gould has a $68 target on the stock and has described Snap as “one of the most innovative and fastest-growing digital platforms”.

With user traffic still strong and AR developments a potential growth driver, Snap has plenty of bite left in it yet.