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Snap Earnings: Here's What to Watch

One of the most interesting earnings reports this week may be Snap's (NYSE: SNAP). The parent company of social media platform Snapchat will give investors one of the first glimpses into how digital advertising is faring in 2021.

Snapchat is a fast-growing platform with soaring digital advertising revenue. Expectations, therefore, are unsurprisingly high. Can the tech company deliver when it reports its first-quarter results on Thursday?

Image source: Getty Images.

Impressive momentum

Snapchat wrapped up 2020 with staggering momentum. Total fourth-quarter revenue rose 62% year over year to $911 million. This put total 2020 revenue at $2.5 billion, up 46% year over year.

This top-line strength was fueled by a 22% year-over-year increase in daily active users and strength in average revenue per user (ARPU). ARPU increased 33% in the fourth quarter of 2020 versus the year-ago quarter.

"We continued to see strong adoption of our advertising products in Q4," explained Snap CFO Derek Andersen said about the company's growth drivers in Snap's fourth-quarter earnings call. Andersen continued:

Revenue from our commercials ad product more than doubled year-over-year in Q4 as we continue to see building demand from advertisers seeking to reach Gen Z and Millennial audiences at scale, and with a full screen video advertising product that is delivered adjacent to brand safe content.

Why growth could accelerate

For Snapchat's first quarter of 2021, analysts are modeling for a slight deceleration in the social network company's revenue growth. On average, analysts are expecting Snapchat's revenue to increase 61% year over year. This is above management's guidance range for first-quarter revenue to increase 56% to 60% year over year.

But it's possible that analysts are undershooting, even though the company's guidance range is lower than the consensus forecast. Management guidance typically proves to be quite conservative, barring the fourth quarter of 2019 when the company didn't anticipate lockdowns resulting from COVID-19 in late Q1 2020. If you rewind back to more normalized quarters pre-COVID, consider that Snapchat's revenue came in ahead of its guidance range in every quarter in 2019.

If the company's track record of approaching its revenue guidance with conservatism is any indication of how Snap's first-quarter top line may trend, the company may not only beat analysts' forecasts but even post a higher growth rate than it did in Q4.

Of course, there's no guarantee this happens. These are unprecedented times for both ad buyers and digital advertising platforms. In addition, there's elevated uncertainty for many companies. This makes forecasting for both management and analysts particularly tricky.

Whatever happens, Snap's first-quarter revenue growth may shed light on how the overall digital advertising industry is doing in Q1. A stronger-than-expected quarter from the company could suggest many digital advertising companies are doing well. A weaker-than-expected quarter, on the other hand, could mean that advertisers are holding back. For Snap specifically, a strong quarter could highlight strength in the company's ad products and Snap's ability to capture wallet share from advertisers as the economy reopens.

Snap reports its first-quarter results after market close on Thursday, Apr. 22.

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