Morgan Stanley Upgrades Snap On Improved Ad Product

Snap Inc SNAP has worked to make its platform more useful to advertisers and done a good job reining in expenses, Morgan Stanley said in upgrading the stock.

The Analyst

Morgan Stanley’s Brian Nowak upgraded Snap from Underweight to Equal-Weight and raised the target price from $14 to $17.

The Thesis

Nowak said Morgan Stanley has underestimated Snap’s stronger top- and bottom-line execution. Snap has sped up its ad revenue growth, and its operating expense discipline is improving, which combined are boosting EBITDA.

Nowak said Snap has worked with advertisers and ad agencies to help them better understand how to use Snapchat for advertising and make it easier, which has led to faster new advertiser growth on the platform and boosted how much each advertiser is spending.

Improved Expense Discipline

“We have growing confidence that SNAP’s management team remains laser-focused on improving efficiency, reducing costs, implementing stronger budgeting processes … and individual manager-level cost accountability,” Nowak wrote in a note.

Snap is expected to see slower daily active user growth in 2020, Nowak said, which keeps Morgan Stanley from being more bullish.

Overall, though, Snap’s young target audience, including teens and those in their 20s, is attractive to advertisers, and that should still drive ad revenue, even if daily user growth is a little lower.

“We don’t see SNAP generating positive adj. EBITDA until '20 but expect healthy operating leverage and high FCF conversion once its ad business scales,” Nowak wrote.

Price Action

Snap's stock traded higher by 5.8% to $15.14 at time of publication.

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