DAU Drop Off, Lack Of Originality: Analysts Aren't Impressed With Snap

Snap Inc SNAP fell nearly 20 percent Friday as the Street weighed marginal top- and bottom-line beats. By and large, experts were unimpressed.

Surface Improvements

Snap surpassed top-line estimates with strong average revenue per user (ARPU) — a metric driven by growth in global online sales and accelerated adoption of programmatic content.

“We believe the transition to programmatic will be less of a headwind going forward and expect more controlled decel in Y/Y ARPU,” JPMorgan wrote, anticipating 2019 ARPU growth of 23 percent.

Pivotal interpreted “favorable” profitability trends and forecasted positive earnings before interest, tax, depreciation and amortization (EBITDA) in 2019. Similarly, Nomura lauded strong monetization and unexpected beats in the profit and loss statement driven by outperformance in North America and Europe.

DAUs Drop Off

Snap’s second consecutive DAU (Daily Active User) decline and guidance for continued deterioration in the fourth quarter were of primary concern. Analysts attributed the trouble to a slow Android app rebuild, which JPMorgan said may be worth the near-term metric misses.

“We believe that Snap doesn’t want to risk another bad rollout experience, and therefore is prepared to absorb some N-T DAU declines,” JPMorgan wrote.

Its analysts expressed optimism in Snap’s recent product improvements, but anticipate ongoing DAU challenges. In particular, they expect Snap to gain little ground in new demographic targets already accustomed to Instagram.

These struggles could limit ad revenue growth, according to Canaccord.

“While monetization trends in Q3 are promising, we don’t think the stock can recover until the user base is growing solidly again,” the analysts wrote. Any such growth could help Snap expand its North America ARPU, which remains solidly below competitor achievements.

Contrary to its peers, Pivotal remained relatively unconcerned about declining DAUs.

“Our current assumption is that that the platform can maintain a sizeable-enough base of users to provide the company with opportunities to improve the platform and sustain its position in the advertising market as a niche digital media platform,” Pivotal wrote.

Lacking Originality

Snap reported new investments in original content and ad formats, but some said the efforts won’t achieve the intended payoffs.

“We believe that FB and [Instagram] with a much larger user and advertiser base will continue to attract incremental ad dollars in the social media space, making it difficult for Snap to gain meaningful market share,” JPMorgan wrote.

The analysts predict 34-percent compound annual revenue growth for Snap between 2017 and 2020 — well below a 69-percent rate for Instagram.

The Ratings

• Canaccord Genuity maintained a Hold rating but cut its price target from $12 to $8;
• JP Morgan downgraded Snap to Underweight and halved its price target from $12 to $6;
• Nomura maintained a Neutral rating but cut its price target from $8 to $7; and
• Pivotal reiterated a Buy rating with an $8 target.

At time of publication, Snap shares traded down 17.3 percent to $5.78, an all-time low.

Related Links:

Amazon, Netflix, Apple Dominate Among Teens

Pivotal Upgrades Twitter, Turns Bullish On Snap