5 Reasons JMP Downgraded Snap (And 4 Reasons They Could Be Wrong)

Snap Inc SNAP's third quarter earnings report disappointed investors and the company's plans to introduce changes to its app has some investors concerned it will negatively impact advertiser demand.

The Analyst

JMP Securities' Ronald Josey downgraded Snap's stock from Market Outperform to Market Perform and removed a $20 price target.

The Thesis

Josey cited five reasons to justify a downgrade of the social media company, including:

• Snap's addition of 4.5 million new daily active users (DAU) in the third quarter marks a slow down in growth;
• Snap's app redesign is expected to negatively impact DAU growth;
• A slower user growth will in turn negatively impact advertiser demand;
• Expectations for ad pricing growth will be pushed out,; and
• The company isn't expected to report a positive EBITDA until 2020.

The analyst also noted four reasons why a bear case scenario might not play out, including:

• User growth could re-accelerate at a faster than expected pace;
• Ad dynamics could improve even at a time when DAU growth disappoints;
• Management's discipline approach to costs could move up the profitability timeline; and
• Snap's desirability as a takeover candidate could return given prior interest.

"We believe the risk/reward in shares is balanced at current levels until we can see user growth stabilize/re-accelerate and greater ad auction adoption," Josey wrote.

Price Action

Shares of Snap were trading lower by more than 1.8 percent at $12.34 Wednesday morning.

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