Why This Morgan Stanley Analyst Has Double Downgraded Snap

There are concerns around Snap Inc’s SNAP revenue and profit outlook, given its disappointing second-quarter results, third-quarter trends so far and certain company-specific challenges, according to Morgan Stanley.

The Snap Analyst: Brian Nowak downgraded the rating for Snap from Overweight to Underweight, while reducing the price target from $17 to $8.

The Snap Thesis: The company has been generating flat year-on-year revenue so far in the current quarter, versus the previously expected growth of around 16%, Nowak said in the downgrade note.

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Snap’s ad business is not as developed as previously thought and “growing this type of business through a weakening macro environment is likely to be even more challenging,” the analyst mentioned.

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“The lower than expected sophistication and 'quality' of SNAP's ad business also raises the risk of TikTok ad dollar share loss,” Nowak wrote. “More tactically, we also assume a decline ahead in 2H:22as we now model 3Q/4Q ad revenue to decline by ~2%/10% Y/Y,” he added.

SNAP Price Action: Shares of Snap had declined by 0.75% to $9.88 at the time of publication Monday.