Earnings Outlook: Snap earnings: Riding the Android redesign to grow its user base

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The buzz over “baby-face” filters has faded, so Snap Inc. will be looking to prove that it’s grown up.

Snap SNAP, +0.80%  saw its best quarter of user growth in its history as a public company back in June, riding the viral launch of filters that allowed users to appear as different ages. That feature was responsible for 7 million to 9 million of Snap’s overall 13 million new daily users back then, with the rest coming from improvements to the Snapchat app. Without the filter craze to lean back on, Snap will have to show that the changes it made to enhance its Android app, in particular, can be a long-term driver of user momentum.

Adding Android users has long been a problem for Snap, since its iOS app for Apple Inc. AAPL, +0.39%   iPhones offered far better functionality. Following a long process of rebuilding the Android app, Snap is finally hoping to reap the rewards of its efforts. Management disclosed on the last earnings call that the new app was driving better retention and engagement. Expect further updates when the company reports third-quarter earnings on Tuesday afternoon.

Snap had a more muted user-growth projection for that quarter, calling for 2 million to 4 million new daily active users during its earnings call back in July. Analysts surveyed by FactSet, on average, expect the number to fall at the high end of that range. Barclays analyst Ross Sandler said that buy-side estimates are in the neighborhood of 6 million to 7 million, which seems “doable” in his view, though the company also tends to deal with “material seasonality” over the summer that tends to result in lower additions.

Assuming Snap is able to maintain positive momentum on user growth, the next step is improving how it monetizes that user base.

What to expect

Earnings: Analysts surveyed by FactSet model a 5-cent-per-share adjusted loss for the third quarter. According to Estimize, which crowdsources projections from hedge funds, academics and others, the average estimate calls for a 3-cent loss per share. A year ago, Snap lost 12 cents a share.

Revenue: The FactSet and Estimize consensuses both call for $435 million in third-quarter revenue, up from $298 million a year earlier.

S tock movement: Snap’s stock has risen following only three of its 10 earnings reports since becoming a public company. Shares have been on a tear this year, however, rising 150% so far in 2019 compared with a 19% gain for the S&P 500 SPX, +0.28%  in that time. Of the 39 analysts tracked by FactSet who cover Snap’s stock, 13 of them have buy ratings, 24 have hold ratings, and two have sell ratings. The average price target listed on FactSet is $18.01, 31% above recent levels.

What else to watch for

Snap’s efforts in gaming are of key interest to analysts, following the company’s recent push to introduce new multiplayer games to keep users more engaged with the Snapchat service.

“While ‘Farmville’ and the like may evoke somewhat dismissive comments today, recall that at its peak, fees related to games on Facebook’s FB, +0.44%  desktop platform generated $1 billion in net revenue and comprised 15% of time spent on Facebook.com,” Evercore ISI analyst Kevin Rippey wrote in a September upgrade of Snap’s stock. “We believe that while Facebook’s audience and broader business has evolved in such a way that gaming distribution is no longer a meaningful point of investor conversation, Snap is uniquely positioned to recreate a similar social gaming platform business on mobile.” He has an outperform rating and $20 target on Snap’s stock.

The company will likely give an update on its gaming progress during the conference call. Guggenheim’s Michael Morris also has a positive impression of Snap’s work in gaming, as he argues it helps the company hook users on more elements of the Snapchat platform that actually generate revenue.

“Importantly, we believe platform usage mix continues to shift to monetizable areas, including discover and games,” wrote Morris, who has a buy rating and $22 target on the shares. “We see these elements combining to drive a narrowing of the revenue-per-user gap between Snap and social media peers.”

Sandler of Barclays has an upbeat view of advertiser traction heading into the report, as Snap has customized performance metrics for various verticals and reorganized its sales force. Though his $436 million revenue estimate is about in line with the consensus view, he sees room for upside there and in regards to the company’s fourth-quarter outlook. (The FactSet consensus calls for $555 million in fourth-quarter revenue, while Barclays model $547 million.)

He has an overweight rating on the stock and a $19 target.