The Snap Bull Vs. Bear Debate After The Q1 Print

Should investors take advantage of the sell-off in Snap Inc SNAP stock after the company's first-quarter print? That depends on which Wall Street analyst you ask.

The Analysts

• Morgan Stanley's Brian Nowak maintains an Underweight rating on Snap's stock with a price target lowered from $12 to $8.
• William Blair's Ralph Schackart maintains an Outperform rating on Snap's stock with no assigned price target.

The Bear

Snap's Q1 report had multiple negative readouts, Morgan Stanley's Nowak said in a research report. They include:

• Revenue missing expectations by $18 million.
• Daily active users falling 3 million short of expectations.
• The guidance implies a "substantial" deceleration in revenue growth on a year-over-year basis.
• User churn and behavior disruption in the quarter can be attributed to the Snapchat app redesign.
• Ongoing poor app performance on Android devices.
• Advertiser concerns relating to engagement.

Snap's earnings report and outlook reaffirms that ongoing challenges remain in turning the business around, the analyst said. There are two events that would warrant a positive stance on the stock moving forward, Nowak said:

• Sustained improvements in advertiser offerings or an ad unit that can monetize the story form of consumption.
• Advertiser growth on the platform or an uptick in spend per advertiser from the programmatic auction.

Morgan Stanley's revised $8 price target is based on a 7x multiple on 2019E EV/revenue, which represents an 18-percent discount to peers. The discounted valuation is warranted given Snap's lower margins and expectations to reach positive cash flow in 2022, Nowak said. 

Related Link: 2 Analysts On What To Expect From Snap's Q1 Report

The Bull

Snap has made "great progress" in switching its core business model from direct ad sales to a self-serve model, as 95 percent of Snap ads were served programmatically, William Blair's Schackart said in a note. Self-serve products resulted in an twentyfold increase in the number of advertisers who actively spend on Snap's platform over the past year, the analyst said.

Ad pricing declined while impressions simultaneously grew "tremendously," which would be consistent with management's commitment to offer an attractive ROI to advertisers, according to William Blair. 

The redesign of the Snapchat app "caused some headwinds" in the reported quarter, Schackart said. Yet the company's progress with new product initiatives — including optimization of the app, Story Ads, Snap Pixel, Lens Studio, and improving performance on Android devices — is encouraging, he said. 

Volatility in Snap's business is likely to remain in the near-term, but the company's effort to improve the product and advertising sides of the business "sets the foundation for longer-term success," Schackart said. 

Price Action

Snap shares were plunging 18.72 percent to $11.48 at the time of publication Wednesday. 

Related Link:

Credit Suisse: Snap's Value Creation Strategy Is Similar To Facebook