First Quarterly Report From Snap Has No Crackle Or Pop

UBS's Eric Sheridan maintains a Neutral rating on Snap Inc SNAP with a price target lowered from $24 to $19 after reporting a "disappointing" earnings report, but that doesn't necessarily destroy the longer-term picture.

Sheridan argued that the social media company's report fell short of investor expectations, which included expecting both user metrics and revenue to surprise on the upside. But one earning report isn't enough to change the longer-term thesis, which will continue to be debated as at the end of the day the report contained a mix of positives and negatives.

The Positives

Sheridan highlighted the fact that Snap's report demonstrated continued momentum in the average time users spend on the platform (more than 30 minutes per day). In fact, users created 3 billion Snaps daily, which marks an improvement from 2.5 billion in the third quarter of 2016.

Sheridan also noted Android users doubled in the quarter and now represents 30 percent of net adds, up from 20 percent last quarter amid product improvements. Also, the company's hosting costs fell 12 percent quarter-over-quarter and operating expenditures per head fell 7 percent sequentially.

The Negatives

On the negative front, Snap's global daily average user net adds of 8 million fell short of the 9 million the Street was looking for while revenue and adjusted EBITDA missed as well. The analyst was also concerned with a lack of commentary from Snap's management related to continued penetration of the non-core 35-year old demographic group.

The Bottom Line

Sheridan believes a debate will take place over the short to medium term on three key issues: 1) growth and engagement, 2) ad monetization and 3) valuation. While none of these areas can be resolved in just one earnings report, the stock will nevertheless be volatile and investors need several more earnings report before jumping to any one conclusion.

In the meantime, the analyst suggested that Snap's stock offers a "relatively even skew" in upside to $31 a share and downside to $11 a share.

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