Tech Transformers

Facebook and Twitter’s history shows Snap’s first earnings might not be an easy ride

Key Points
  • Facebook and Twitter shares both tanked after their first earnings reports.
  • Expectations are high for Snap Inc's first every earnings report on Wednesday.

When Facebook released its first earnings report as a public company in July 2012 and Twitter in February 2014, both beat expectations while revenues rose.

It appeared to be a good start but Facebook's shares fell 11.7 percent on the first day of trading after the earnings report, while Twitter's dropped over 24 percent.

Snapchat owner Snap Inc is the most comparable company to Facebook and Twitter to recently go public. It is gearing up to report its first ever earnings as a public company on Wednesday and expectations are high.

Analysts expect the company to report revenues of $158.3 million, a 308 percent year-on-year rise, according to Factset. And the market is anticipating daily active users (DAU) – a key metric for Snap – to rise to 170 million from 158 million the quarter before.

Of course, if Facebook and Twitter's stock reaction is anything to go by after their first quarterly reports, it could spell trouble for Snap Inc when markets open on Thursday the morning after.

The problem is that for these hot tech stocks, excitement and anticipation so high that they deliver results that continue very high growth, and that is baked into their valuations.

Snap for example trades on 17.2 times enterprise-value-to-revenue multiple – a key metric to judge whether a stock is expensive or cheap. Meanwhile, Facebook sits on 9.3 and Twitter is on 4.6 and so are seen as cheaper.

"They need to put in a big revenue growth quarter because you have a valuation here that is very high on an adjusted basis," Neil Campling, head of technology, media and telecoms research at Northern Trust Capital Markets, told CNBC via phone on Tuesday.

Tale of two stocks

Even though Facebook and Twitter both had rough starts with their first earnings report, the story is very different today. Facebook has continued to grow revenues strongly and this has meant its shares are up nearly 300 percent since its initial public offering (IPO). Meanwhile, Twitter has failed to grow revenues while the growth of its users has slowed significantly. Shares of the social media firm are down over 55 percent since going public.

Twitter and Facebook have only ever missed analyst earnings per share estimates on one occasion, according to data from data analytics firm Kensho. But Twitter has missed on user growth and revenue numbers on several occasions. And shares post-earnings reflect that. On average, if you bought shares of Twitter a day ahead of earnings and sold them on the close of the first trading day of the report, you would be down 5.34 percent, Kensho data shows.

Conversely, doing the same with Facebook would have given you a return of 3.2 percent.

Snap short interest high

Snap is hoping to become more like Facebook than Twitter when it comes to share price performance. But there is a lot of bearishness in the market, according to short interest data.

Shorting a stock involves an investor borrowing a security and selling it. If the share price then falls, the investor will buy it back and make a profit. Short interest refers to the amount of short positions that have not been closed.

Current short interest in Snap is 8.5 percent of the entire free float of shares, according to IHS Markit. Around 60 percent of the shares that are out on loan have been borrowed. In comparison, on the day of Facebook's earnings report on July 26, 2012, short interest in its stock was 13.3 percent. Twitter's was 5.7 percent.

Analysts said traders are positioned for a fall in Snap's share price after earnings.

"There are a fair few people positioned to profit from that," Simon Colvin, vice president at IHS Markit, told CNBC by phone on Tuesday.