• Snap stock up 40% year to date ahead of Q3 earnings.
  • Wall Street is projecting higher revenues and lower earnings.
  • The focus will be on daily active users’ growth and the impact of new products and creative tools.

Snap is scheduled to report its third-quarter results on September 21, 2021, after the market close. Expectations are high that the social media heavyweight will beat consensus estimates on revenue with earnings coming in line.

The company heads into the earning session at the back of an impressive run in the market. The stock is up by more than 40% year to date, outperforming the overall market. Therefore an earnings beat could be the catalyst to steer the stock higher after an 8% pullback from all-time highs.

Chart showing Snap price action

The prospects of Snap beating estimates are high given that it has beaten analysts’ expectations on revenue and earnings in the last four quarters. Additionally, the company has registered a substantial increase in engagement levels, with average daily users increasing significantly every quarter.

Q3 earnings expectations

Wall Street expects Snap to deliver revenues of $1.1 billion, representing a 62% jump from $676.7 million delivered the same quarter last year. The company on its own expects revenue to range between $1.070 billion and $1.085 billion. The North America segment is expected to continue driving results; while a 62% jump would be an impressive feat, it will mark a slowdown from a 116% year-on-year growth delivered in the second quarter.

Chart showing Snap Quarterly revenue growth

Additionally, Wall Street expects Snap to deliver a significant jump in adjusted EBITDA, expected at $136.9 million compared to just $56.3 million delivered the same quarter last year. However, the company is expected to remain in the red with a net loss of $143.4 million, narrower than the $199.9 million delivered the same quarter last year.

Daily active users were up by 55 million in Q2 to highs of 293 million. Estimates indicate the social networking giant powered through the 300 million active users in Q3, representing a 20% plus year-over-year increase.

What to look out for when Snap Inc. reports

In the second quarter, Snap’s revenue and daily active users grew at the highest rate achieved in the past four years. Investors will want to see if the momentum continued in the third quarter, given the scrutiny on the regulatory front that has come into play in the recent past.

Regulatory scrutiny surrounding the use of social media by children has been a big bottleneck waiting to see the kind of impact it might have had on the social network. Facebook has already been forced to delay the rollout of an Instagram app targeting kids under 13.

The focus will also be on the run rate on daily active users, which is crucial to Snap attracting advertisers and generating revenues. North America has been a key driver in DAU growth, with Europe following consequently.

Snap Inc. launched 177 million new international Discovery Channels in the second quarter, with 36 in the UK and 24 in India. The company also teamed up with Sony Pictures Network to launch five shows. The push was part of an effort to bolster engagement levels on the network waiting to see the kind of impact it is having.

Snap launched a series of creative tools during the quarter, including custom Stickers and Augmented Reality enabled lenses. Discovery content and Shows are also believed to have driven user growth. A significant increase in DAU should have bolstered the company’s ad spending environment, consequently higher revenues.

Spotlight, Snap’s newest platform offering the most entertaining snaps from the community, has also seen a significant increase in daily active users and daily time spent by users in the US. Consequently, it is expected to drive Q3 results.

Bottom line

Snap stock could trade higher on Q3 earnings coming in better-than-expected. The stock is down by about 8% from all-time highs and in dire need of a new catalyst to bounce back and take out the 52-week high. The stock appears to be trading at a premium, going by a forward price to earnings multiple of 129.