It’s a very rewarding trading day for investors in Snap Inc (NYSE:SNAP) with shares up over 45%, making the stock Wall Street’s bull of the day. The reason? The social media giant reported significantly better than expected fourth-quarter revenue. Specifically, revenue rose 72% to $286, from $166 million in the same period a year earlier, while topping the $253 million expected by the Street.
However, while Snap investors bask in their big gains today, Wedbush analyst Michael Pachter believes it’s still early to celebrate. Pachter reiterates a Neutral rating on Snap stock, with a new price target of $12.50, which implies a potential downside of 38% from current levels. (To watch Pachter’s track record, click here)
Pachter wrote, “Expect solid revenue growth ahead, while lack of visibility into sustained cost control and user growth tempers optimism. While we have modeled solid revenue growth for 2018 and 2019, we are reticent to model more than 50% growth in the coming year and 33% the year after, resulting in a rough doubling of revenue and a Q4:19 gross margin of 44%. At the same time, we expect costs to continue to rise, particularly for R&D and for sales and marketing, and do not anticipate profitability for the next 3 – 4 years. We believe that advertisers will warm up to the Snapchat platform once they see signs of accelerating growth, but our rating and price target reflect our pessimism that such growth will materialize.”
Bottom line: “Decelerating growth trends, fierce competition for user mindshare and advertiser dollars, and a history of being hugely unprofitable keep us on the sidelines.”
The majority of the Street sides with Pachter’s cautious take on the social media player, as TipRanks analytics demonstrate SNAP as a Hold. Out of 27 analysts polled in the last 3 months, 8 are bullish on SNAP stock, 12 remain sidelined, while 7 are bearish on the stock. With a potential downside of 23%, the stock’s consensus target price stands at $15.93.