Troubling User Growth, Rising Costs: Analysts Dissect Snap's Mixed Q1 Earnings

Snap reported a 1 percent year-over-year drop in daily active users in the first quarter after reporting 15 percent growth in DAUs in the first quarter of 2018. Traders may have also taken the opportunity to cash in on more than 100 percent year-to-date gains in Snap shares.

Several analysts have weighed in on Snap following the earnings report. Here’s a sampling of what they had to say.

Troubling User Growth Commentary

Nomura Instinet analyst Mark Kelley said solid daily active user growth and cost-cutting helped narrow losses in the first quarter, but Snap still has a lot to prove.

“This quarter brought a number of encouraging data points, but the company is still on a long track to profitability,” Kelley wrote in a note.

Morgan Stanley analyst Brian Nowak said the first quarter was clean, but commentary about slowing user growth in the second quarter was troubling.

“Better monetization showcases SNAP's progress in turning around its platform, while more tepid forward user commentary could hold back further multiple expansion as sustained stronger user growth could be further off,” Nowak wrote.

Android App Launch In Focus

Canaccord Genuity analyst Maria Ripps said investor focus now shifts squarely to the recently launched Android app update, which was initially well-received.

“Despite this positive feedback, it may take time for Snap to bring large numbers of users back to the platform, and management expects Q2 to see a lower number of sequential net additions compared to Q1, which is also consistent with historical seasonality,” Ripps wrote.

Guggenheim analyst Michael Morris said it remains to be seen whether the Android update will result in a return to sustained user growth.

“While the company noted sequential DAU acceleration was partly attributable to seasonality, it remains confident the refreshed Android app will meaningfully contribute to DAU growth, particularly among users with lower end devices,” Morris wrote.

Rising Costs

Raymond James analyst Aaron Kessler said beats on revenue, earnings and global DAUs were three positives from the quarter.

“Management noted that positive trends in user engagement may increase infrastructure costs and Snap plans to make continued investments in marketing, content, engineering, and sales to support its in its long-term goals,” Kessler wrote.

Jefferies analyst Brent Thill said there are still a couple of things left for Snap to figure out.

“They have to get a CFO on board, and certainly this pathway to profitability,” Thill said.

New Constructs analyst Sam McBride said the stock’s initial pop is a sign of just how low the bar is set for Snap.

“There’s been so much bearishness, so much trouble with this company over the last two years that it seems like the market is willing to reward them for just the slightest signs of improvement,” McBride said.

Ratings And Price Targets

• Nomura Instinet has a Neutral rating and $10 target.
• Morgan Stanley has an Underweight rating and $9 target.
• Canaccord Genuity has a Hold rating and $13 target.
• Guggenheim has a Neutral rating and no target.
• Raymond James has a Market Perform rating and no target.

Snap's stock traded down 4.7 percent to $11.42 per share Wednesday afternoon.

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