Snap Inc Rapid-Fire Revenue Gains Left in the Shade of Weak Profitability: Wedbush

Dipping Growth Trends, Intense Competition, and an Unprofitable History Cast Caution on Snap's Prospects


Are Snap Inc (NYSE:SNAP) comps pulling a magical Houdini “disappearing act” when up against social media kings of the court Facebook and Twitter?

With user growth screeching in its tracks at a time the popular Snapchat app parent company is confronting a cutthroat, competitive game for capturing the market, all while profitability is slinking away, Wedbush analyst Michael Pachter cannot help surveying with a wary eye in his initiation coverage.

History does not shine positive on Snap’s profitability, and with ad dollars at risk amid rocky growth trends, the analyst initiates a Neutral rating on SNAP stock with a $12 price target, which represents a just under 20% downside from where the shares last closed. (To watch Pachter’s track record, click here)

First, the analyst looks at daily active user (DAU) net additions throughout the last 13 quarters, which hit a high in the second quarter of last year at 21 million, finding this “spread evenly” domestically and internationally.  However, “By Q4:16, the number of net additions had dropped precipitously to just 5 million, with North America and Europe at roughly 3 million each, and the Rest of World flat, with the latter geography hurt by technical issues on Android,” underscores Pacther, who elaborates, “The sequential drop-off in net additions from Q2:16 through Q4:16, with Q2:16 at 21 million, Q3:16 at 10 million, and Q4:16 at 5 million, bucked the trend seen in 2015, when DAU additions increased from 6 million to 8 million to 13 million over the last three quarters of the year.”

Also consider that “Snap faces stiff competition from a slew of much larger competitors,” the analyst argues. Just look at the company’s second quarter average DAU figure of 173 million- meaningfully under Facebook’s DAU figure of 1,325 million and MAU figure of 2,006 million and even Twitter’s MAU figure of 328 million.

Facebook-acquired Instagram is one of Snap’s largest threats, as CEO Mark Zuckberg continues hot on Snap’s trails in a game of copycat, with Instagram securing beyond 700 million MAUs by the end of July, and Instagram Stories showcasing more than 250 million DAUs. Even Facebook’s WhatsApp glimmers with MAUs beyond 1.2 billion, and WhatsApp Status had garnered over 250 million DAUS at July’s close.

Pachter believes, “The growth of Instagram Stories and WhatsApp Status highlights the compelling nature of a format first pioneered by Snap, as well as the fierce competition for user mindshare that the company faces from Facebook driven by its huge audiences and its ability to deploy significant development resources efficiently.”

For those who might point to “rapid revenue growth” in praise, the analyst warns that this plus “may be overshadowed by decreasing profitability.” Non-GAAP net losses and free cash flow for the company added up to ($184 million) with a whopping ($1,080 million) for the fix quarter period that closed out the second quarter of this year. Meanwhile, the first half of 2017 exhibits figures of (-$387 million) coupled with (-$402 million), which the analyst fears are “on pace” to hit past the 2016 results of ($-466 million) and (-$678 million).

Ultimately, Snap’s bigger picture looks questionable to Pachter, who surmises, “Decelerating growth trends, fierce competition for user mindshare and advertiser dollars, and a history of being hugely unprofitable keep us on the sidelines.”

TipRanks analytics demonstrate SNAP as a Hold. Based on 27 analysts polled by TipRanks in the last 3 months, 9 rate a Buy on Snap stock, 12 maintain a Hold, while 6 issue a Sell on the stock. The 12-month average price target stands at $15.24, marking a nearly 2% upside from where the stock is currently trading.

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