This is the calm before the storm. Social media company Snap (NYSE: SNAP ) is set to report highly anticipated second-quarter numbers after the bell on Tuesday, Aug. 7. Over the past few months, SNAP stock has traded largely sideways, bouncing around $13 for most of June and July.
But don't be fooled. This is just the calm before the storm that will ensue after Snap reports second-quarter earnings.
Those earnings will create a storm because of what, or rather who , Snap is following. Peer social media companies Facebook (NASDAQ: FB ) and Twitter (NYSE: TWTR ) both reported disappointing second-quarter numbers recently, and both stocks dropped 20% in response to those reports.
Thus, precedent says that Snap, too, will report ugly numbers and that SNAP stock will drop like a rock. But if Snap manages to buck the trend and report strong numbers, SNAP stock could soar because adverse digital advertising sentiment has kept this stock from rallying recently.
All together, Snap's Q2 earnings promise to be an event wherein SNAP stock either drops big or rallies big.
Which of those outcomes is more likely?
I think SNAP stock drops big after earnings. But I also think that, as has been the case with almost every other big post-earnings dip in SNAP stock, that dip will be a solid buying opportunity.
Here's a deeper look.
Don't Expect Big Numbers From Snap
I really don't think there is any way that, in the same quarter in which Facebook and Twitter reported bad numbers, Snap turns around and reports a good quarter.
These guys all operate in the same space. Thus, the same user, revenue and margin growth concerns that are presently hitting Facebook and Twitter are likely also hitting Snap. The one exception here is if Snap is actually stealing users and revenue market share from Facebook and Twitter, then its growth will look very different than Facebook and Twitter's growth.
I don't think that's the case.
From a ground-level perspective, my observation is that Instagram Stories usage has only grown exponentially over the past several months, while Snapchat Stories usage has actually dropped. Search interest and app ranking data seems to support this observation. The divergence between search interest in "Instagram" and search interest in "Snapchat" has only grown wider over the past several months, with Instagram search interest gaining ground and Snapchat search interest losing ground.
Meanwhile, according to SimilarWeb , Instagram's App Store ranking was consistently above Snapchat's App Store ranking in July.
In other words, it looks like Instagram is kicking Snapchat's butt. Because of this, I don't think Snap will buck the social media trend and report strong second-quarter numbers.
Instead, I think you will see the same problems you saw in the Facebook and Twitter reports. Namely, user growth will be slow due to user base saturation. Revenue growth won't be as good as expected due to moderation in ad spend. And margins will be pressured by investments into new ad tech and platform safety.
If the Stock Drops Big on Earnings, Expect a Multi-Month Bounce
If SNAP stock does drop in dramatic fashion following earnings, it will bounce back, like it always does.
If you look at the chart for SNAP stock, you will see a familiar pattern arise. The quarterly numbers are almost never good. SNAP stock almost always drops big. But, then the stock almost always proceeds to rebound in dramatic fashion.
Then, it drops again after the next earnings report.
The same thing will happen this time around. If SNAP stock drops meaningfully, then you will probably see this stock settle around $10 to $11 per share. By my numbers, that would make SNAP stock a buy.
In 5 years, I think Snap can grow its user base to around 270 million. During that stretch, average revenue per user should trend towards $10 to $15, and operating margins should head towards 30% as gross margins scale and the opex rate falls back. Putting all that together, I think Snap can do about 60 cents in earnings per share in five years.
A big-growth 25 forward multiple on that implies a four-year forward price target for Snap stock of $15. Discounted back by 10% per year, you are looking at a year-end price target for Snap of $11 to $12.
Bottom Line on SNAP Stock
When it comes to SNAP stock, I think we have a situation of near-term pain, long-term gain. I'm sitting out the near-term pain part, which should finish sometime next week after the company reports earnings. Then, I'll jump into the long-term gain part.
As of this writing, Luke Lango was long FB.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.