Snap Inc (NYSE:SNAP) is expected to remain under pressure to demonstrate stronger advertising revenue growth when it reports second-quarter earnings, with Jefferies saying the company's ads business continues to be the key issue despite expectations for improving overall revenue growth.
The brokerage reiterated its ‘Buy’ rating on Snap while lowering its price target to $5.50 from $8, writing that although it remains positive on the company's engagement scale and long-term monetization opportunity, "the core issue remains ad rev growth, which has yet to show meaningful improvement."
Snap shares traded hands at about $4.40 on Thursday afternoon, down about 45% so far this year.
Jefferies expects Snap to report Q2 revenue growth of 14% year over year, in line with Wall Street estimates. The analysts wrote that advertising revenue should reaccelerate from 3% growth in the first quarter, helped by an easier year-over-year comparison and guidance that had already incorporated a full quarter of Middle East-related headwinds.
The firm said revenue from Snap+ subscriptions and Memories products remains more difficult to forecast because of limited visibility, though it remains constructive on the recent momentum in those businesses.
For the third quarter, Jefferies wrote that the Street's forecast for 13% year-over-year revenue growth appears achievable, with potential upside from World Cup-related advertising spending and Memories Storage. The analysts noted that consensus implies quarter-over-quarter revenue growth consistent with seasonal trends over the past three years, while the expiration of the 12-month Memories Storage grace period in September could provide an additional boost.
Jefferies also identified daily active user growth as a swing factor, citing age verification requirements and other regulatory changes. While the firm sees limited revenue risk from those changes, it noted they could weigh on investor sentiment if engagement growth slows further.
On profitability, Jefferies expects Snap to reiterate its full-year cost guidance following its April restructuring, including operating expenses of about $2.75 billion, other cost of goods sold at 16% to 17% of revenue, and infrastructure costs of $1.6 billion to $1.65 billion.
While Jefferies remains constructive on Snap's longer-term monetization opportunity, it wrote that continued investment in Specs following a weak initial reception, along with the collapse of a partnership with Perplexity, has tempered expectations, leaving the company's advertising growth as the primary focus heading into earnings.