Citi Downgrades Snap To Sell Amid Negative Sentiment Of Snapchat's Redesign

Snap Inc SNAP surprised investors a couple of weeks ago with its first ever better-than-expected earnings report, which sent shares soaring above the $20 mark for the first time since June 2017. Despite many signs of optimism, one Wall Street analyst thinks investors should be selling the stock.

The Analyst

Citi's Mark May downgraded Snap's stock from Neutral to Sell with a price target lowered from $18 to $14.

The Thesis

May is recommending investors be sellers of Snap's stock for four reasons.

The company's redesign of its Snapchat app is seeing a "significant jump" in negative reviews. This could result in a drop of users and user engagement, which in turn impacts the company's financial results.

Snap's near-term transition of its create ad tools towards a self-service offering could result in pressure to pricing and the potential for revenue headwinds, according to the analyst.

Snap reported an adjusted EBITDA loss of $159 million and negative free cash flow of $198 million, May said. These figures both worsened on a year-over-year basis and are likely to continue as the company may need to burn $3 billion before reaching breakeven and may even need to raise additional cash in 2020.

Snap's current valuation of 20 times forward revenue is not only the highest multiple among the analyst's coverage universe, but a premium to its historical average of 18.8 times.

Price Action

Shares of Snap were trading lower by around 4.4 percent at $19.46 Tuesday morning.

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