Top analyst Youssef Squali is out with words of warning in his initiation coverage on Snap Inc (NYSE:SNAP), predicting that after back-to-back quarters of disappointing earnings, shares still have even more room to drop through the next year. Calling out fierce competition from the likes of Facebook-acquired Instagram as well as new self-serve/programmatic platforms, the analyst sees ad pricing under hot water. Additionally, Squali underscores challenging year-over-year comps to beat considering Olympics and elections of the third quarter of last year that brought in $15 to $20 million in revenues.
Therefore, even though consensus expectations have already been reigned in for this year and the next on back of Snap’s weak quarterly showcases, the analyst alerts investors that even these forecasts are likely to be steep for the social networking giant to meet. Squali himself even appreciates the platform and highlights prospects for monetization- but for now, downside potential stake is stark.
The analyst is cautious to discern between short and long term projections on the tech giant, however, pointing out: “Snap boasts 173M DAUs up 21% Y/Y (2Q17), but monetization has been the primary driver of revenue growth, with ARPU up 98% Y/Y, fueled by increases in Europe and NA. We expect monetization growth to slowdown ST but see a long runway LT still, given current monetization levels at FB/Instagram and Youtube.”
Despite this potential long term runway, Squali sees headwinds up ahead as “Mgt’s on-going efforts to simplify the ad-buying process by introducing self-serve and programmatic platforms are driving ad volumes up, but are depressing ad pricing.” As a result, “While cons. estimates for FY17/FY18 have been lowered after two consecutive quarters of underperformance, we believe that current consensus forecast is still too high,” opines the analyst.
While Snap has a “Great Story Telling Platform” and is working hard to implement new ad products, the analyst is not convinced that the company will be able to keep pace with YouTube or Facebook/Instagram on ad ROI considering that the competition is working on a much larger scale. True, Snap maintains a large, young, and engaged user base, and this can be an asset moving forward. However, in the short term, bringing in advertisers and ramping up ad spend is “likely to take time to overcome, causing the stock to underperform” says Squali.
As such, pinpointing these various, glaring challenges circling the company like a hawk, the analyst initiates a Sell rating on SNAP stock with a price target of $10.00 representing a 23% drop below current trading levels.
Youssef Squali has an excellent TipRanks score with a 73% success rate and a high ranking of #27 out of 4,627 analysts. Squali realizes 19.6% in his annual returns. When recommending SNAP, Squali earns 38.7%.
TipRanks analytics showcase SNAP as a Hold. Out of 27 analysts polled by TipRanks in the last 3 months, 9 are bullish, 6 bearish, while 12 are sidelined. With an upside potential of 18%, the stock’s consensus target price stands at $15.48.