Sep 26, 2019

Market News: Comeback Stocks: Why Snap's Snapback Is Real

By Mark Kolakowski

Social media company Snap Inc. (SNAP) was a red-hot IPO, but its shares peaked on its second day of trading, March 3, 2017. From there to an intraday trading bottom on Dec. 21, 2018, Snap plummeted 83.6%. Since then, the stock has vaulted upward by a spectacular 255% through the close on Sept. 25, 2019.
Michael Morris, an analyst with Guggenheim Securities, calls Snap "well positioned to outperform our Internet and Media coverage universe through year end and provide an investor return of nearly 30% through the next 12 months," as he wrote in a report released on Sept. 24 and quoted in Barron's. His price target is $22, or 28.6% above the Sept. 25 close.

The Road Down

In 2018, owners of Apple iOS devices disliked a redesign of the app, curtailing usage, as reported by Barron's. Daily user growth had stagnated or declined during the final three quarters of 2018, The Wall Street Journal reports. Adding to the negatives surrounding the company, several top executives left in 2018.
Snap has turned in earnings reports that have beaten consensus estimates in each of the last four quarters, but by posting smaller than expected losses rather than larger than expected profits.

Key Takeaways

  • Snap's share price plummeted from its March 2017 IPO to Dec. 2018.
  • Active users stagnated or fell through most of 2018.
  • A redesign for Apple devices was poorly received.
  • Now usage and advertising are on an upswing.
  • A redesign for Android devices has gotten good reviews.
  • Gaming and e-commerce applications are growing.

'Unique Value Proposition'

Snap offers a "unique value proposition for advertisers [that] should drive momentum through 2020 and beyond," argues Michael Morris of Guggenheim. Usage already has been boosted by a new design for Android devices. In particular, he notes that Snap users in the 18 to 34 age bracket are spending increased amount of time on the app, including with functions other than messaging.
Morris sees "long-term revenue potential at Snap as the most under-appreciated in our universe which should support a sustained premium valuation multiple." He believes that continued improvements to Snap's platform will increase advertising, producing revenue growth beyond current expectations. He also sees Snap becoming a major player in gaming as well as e-commerce, with an increasingly global footprint.

Growing Usage

Snap's monthly active user base is over 500 million, compared to 335 million for Twitter Inc. (TWTR) and 2.4 billion for Facebook Inc. (FB), per Barron's. Snap's daily active user base expanded by 4 million in 1Q 2019 and 13 million in 2Q 2019, raising the daily figure to 203 million, according to another Barron's report.
Meanwhile, the intense regulatory and political scrutiny focused on Facebook may be encouraging some advertisers to choose Snap instead, Barron's observes. Shyam Patil, an analyst with Susquehanna Financial Group, indicates that better self-service technology, a reorganization that has helped advertisers understand how to use Snap, and “lower-cost inventory” are the positives for Snap, per yet another Barron's article. However, he has a neutral rating on the stock.

Challenges Ahead

A cautionary view is voiced by Youssef Squali, an analyst with SunTrust Robinson Humphrey. He acknowledges positives for Snap such as growth in active users and user engagement, driven by desirable updates and increased content. However, spending on product development, marketing and hiring “could further pressure margins," he warned, as quoted by Barron's. He rates Snap a hold.
Meanwhile, Snap is not expected to turn a profit before 2023, and the next economic downturn, which many observers think is long overdue, is bound to send its ad revenue tumbling, pushing that key date yet farther into the future. “We would be cautious regarding cash-flow-negative companies” as a result, warns Mark Kelley, an analyst with Nomura Instinet, per Barron's.

Earnings Outlook

The 3Q 2019 earnings report from Snap is expected to be released late in October, per Yahoo Finance. The consensus estimate calls for EPS that is a loss of 5 cents, versus per share losses of 12 cents in the same period of 2018, 10 cents in 1Q 2019, and 6 cents in 2Q 2019.
With respect to revenues, the 3Q 2019 consensus forecast is $434 million, a year-over-year (YOY) jump of 45.9%, and an increase of 11.9% from 2Q 2019.
Among the 36 analysts covering Snap, just 6, or 17%, rate it a buy or a strong buy. Their average price target is $16.57, or 3.2% below the close on Sept. 25.

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