Snap and Pinterest Stocks Rise On Analyst Upgrade - Jefferies Lays Out Bull Case

Snap Inc SNAP and Pinterest Inc PINS stocks gained after Jefferies upgraded the stock ratings to Buy.

Analyst James Heaney upgraded Snap from Hold to Buy and raised the price target from $12 to $16.

The re-rating reflected his increasing optimism around recovery in the direct response (DR) platform. 

Heaney's more optimistic view reflected recent improvements to the DR platform (70-75% of revenue), likely to drive better advertiser performance and faster budget growth. 

The analyst saw early signs of the DR-driven turnaround, as last quarter's 11% Q/Q growth was the most rapid Q/Q Q3 growth since Q3 FY20. Heaney noted that North American revenue could grow in the mid-teens in FY24 (vs. -7% in FY23), as the rebuild of the DR ad platform had a temporary negative impact on large advertisers already reversing. 

The decision to enable on-platform checkout with Amazon.Com Inc AMZN indicates that SNAP is deepening its integrations with large advertisers to encourage more ad spend.

Heaney raised his FY24 revenue and EBITDA estimates by 3% and 29% (or $76 million), respectively, bringing us 2% and 22% ahead of Street. Heaney's FY23 revenue is $4.62 billion, and FY24 revenue is $5.33 billion compared to the consensus of $4.61 billion and $5.20 billion.

Heaney upgraded Pinterest from Hold to Buy and raised the price target from $32 to $41.

The impressive Q3 results and a deeper look at pricing/volume drivers convinced the analyst of the possibility of 20%+ revenue growth in FY24 (vs. 3-5 year guide of mid-to-high teens growth). 

PINS is a rare story in consumer Internet with tailwinds in FY24 for every key revenue growth driver (users, ad load, engagement, pricing). Additionally, Heaney noted that he initially underestimated the EBITDA margin potential as revenue coming from AMZN and other 3P demand partners will likely have a higher incremental margin than 1P demand.

Heaney raised his FY24 revenue and EBITDA by 3% and 9%, respectively, and are now 1% and 9% ahead of Street. 

Heaney's FY23 revenue is $3.06 billion, and FY24 revenue is $3.63 billion compared to the consensus of $3.06 billion and $3.59 billion.

Price Actions: SNAP shares traded higher by 6.16% at $13.78 on the last check Thursday. PINS shares traded higher by 1.89% at $33.91.