Snap, Inc.
Snap Inc. is a “camera company”—or so it proclaims in its Securities and Exchange Commission filings. But by most financial measures, its first piece of camera hardware was an unmitigated flop.
Version two of Snap’s connected glasses, called Spectacles, launched on Thursday, ahead of its first-quarter earnings set for release Tuesday after the bell. But the first version may have cost the company hundreds of millions in losses.
In the fourth quarter of 2018, Snap logged a $40 million write down from its unsold hardware, and the company lost about $220 million on the 220,000 it did sell since its launch on Nov. 10, 2016. That amounts to about $44 million each quarter, which doesn’t include the company’s research and development spending, which crossed $100 million in the December quarter as it has grown since the company went public last year.
The per-unit losses resulted because each $130 Spectacles unit the company sold resulted in a loss of about $100, according to Cheddar, which could make Snap’s hardware unit responsible for a significant chunk of its $350 million in fourth-quarter net losses.
From the early reviews, “Spectacles 2,” looks to have incrementally improved on the original design, adding new features such as still photos—the original could shoot only video—while improving on the basic frame and case designs. They cost $150, $20 more than the first version, and investors gave the stock a lift after the announcement.
Despite the company’s stumble with its first hardware product, and the still-to-be-seen success or failure of version two, the company reportedly has a third version in the works that may add features such as augmented reality, an additional camera, and GPS at double the price.
Snap also announced an update to its January redesign Wednesday, and shares suffered as a result. Expect updates on the much-maligned redesign in Tuesday’s earnings report and call.
Here is what to expect
Earnings: On average, analysts polled by FactSet project losses of 29 cents a share and adjusted losses of 17 cents a share. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict losses of 15 cents a share.
Revenue: For the first quarter, analysts estimate sales of $243 million and Estimize contributors predict revenue of $256.7 million. Snap is expected to bank $1.27 on average per active user, and grow its daily active user count to 193.93 million. North America is the most valuable region for the company and users there are expected to be worth $2.30 on average in the first quarter, according to FactSet.
Stock movement: In the past three months, Snap stock has gained 4.9%, as the S&P 500 index has fallen 7.2%. Snap stock is off 35% in the past year, while the S&P 500 has gained 12%.
Of the 25 sell-side analysts who cover Snap, seven have a buy rating, 18 have a hold and 10 have the equivalent of a hold on the name. The average price target is $15.63, which represents a 9.9% upside from Thursday’s close.
What else to look for
With Snap’s flagship Snapchat app rolling out a redesign in January, which separated the user content from that which was generated by publishers and celebrities, analysts are watching closely for the effects on earnings and sales. The new version of the app generated backlash from users that did slow downloads during the quarter to some extent, Wedbush analyst Michael Pachter wrote in a note to clients Friday.
Kylie Jenner’s comments on the app design and Rihanna’s comments on an offensive ad the company ran seemed to push the stock down too.
It’s possible the new design drove more sales, however. Pachter wrote, “In early tests, management noted that the redesign resulted in higher ad performance in terms of both view time and engagement.” Pachter rates the stock a hold with a $12.50 price target.
RBC Capital Markets analyst Mark Mahaney noted two significant changes in the company’s operations: that it was reducing its global workforce by 7%—which amounts to $25 million in savings in 2018, and $34 million in years after—as well as centralizing its offices in Santa Monica. Moving the office will cost between $25 million and $45 million. Mahaney has a buy on the stock with a $21 price target.
Snap looks like a strong company, Mahaney wrote in an April note to clients, because ad prices have potential to increase “a lot,” while the redesign could boost ad performance and engagement as the company’s cutbacks pare costs.
“At a high level, we continue to see very good signs of product innovation—maybe the only real sustainable growth driver in ’Net Land—and we point to Maps and Promoted Stories as examples,” Mahaney wrote.
The app redesign caused Cowen analyst John Blackledge to raise a proverbial eyebrow. In a Friday note to clients, he wrote that the redesign costs and other investments will contribute to higher operational expenses in the first quarter. Blackledge has the equivalent of a sell on the stock with a $12 price target, which he dropped from $14.