Top Analyst Says Snap Inc (SNAP) Layoffs in Sales Are ‘Concerning’

Likewise, Youssef Squali finds himself puzzled by layoffs in engineering as he reacts to Snap's recent 8-K filing.

Snap Inc (NYSE:SNAP) shares are currently mirroring what is happening to the social media player’s global workforce- both down about 7%.

Investors are taking a step back amid the news 200 employees are about to be laid off, as noted in the company’s 8-K filed over the weekend. Notably, this marks the company’s third round of layoffs.

CEO Evan Spiegel’s goal is to save $25 million in salary and payroll expenses this year for his company, about $34 million annualized. The 8-K likewise indicates the company anticipates $10 million in expenses for severance coupled with a $31 million as a forfeiture benefit from SBC.

To top analyst Youssef Squali at SunTrust, the “8-K reveals more about [Snap’s] intent to accelerate profitability,” and the analyst is taken off guard to see yet another turn of layoffs taking place at a company that has grown at such a rapid-fire pace.

In reaction, the analyst reiterates a Hold rating on SNAP stock with a $15 price target, which implies a 2% upside from current levels.

That said, “we believe these are incremental steps needed to fulfill Spiegel’s reported (Axios) goal of reaching profitability at year-end,” acknowledges Squali, who angles for EBITDA profitability to be achieved in two years. For this year, the analyst forecasts operating expenses to circle $2.1 billion. Additionally, the analyst notes prospective losses running amiss from leases in Los Angles broken in trying to consolidate the SNAP staff into a streamlined corporate office.

Squali is not taking the news lightly: “Considering the pace at which Snap had expanded and its shifting product and advertising focus, we believe that hiring employees that turn out not to be a great fit is to be expected. However, the scale of the layoffs and the departments from which they emanated are somewhat surprising. Changes to the content team are understandable considering changes in product focus. Layoffs in engineering are more puzzling given the torrid pace of product releases that’s happening at the company, and needs to continue to happen. Layoffs in sales are also concerning to us as we expect revenue growth to remain very strong in FY18 over FY17 at ~60%, to $1,322M; although we recognize that the shift to programmatic ad selling, and to self-serve for SMBs (a major source of growth recently) do require smaller sales teams.”

Youssef Squali has a very good TipRanks score with a 69% success rate and a high ranking of #53 out of 4,765 analysts. Squali garners 19.6% in his yearly returns. However, when recommending SNAP, Squali forfeits 12.4% in average profits on the stock.

TipRanks showcases the millennial tech darling as a stock dividing Wall Street opinion. Out of 23 analysts polled in the last 3 months, 7 are bullish on SNAP stock, 9 remain sidelined, while 7 are bearish on the stock. With a return potential of nearly 9%, the stock’s consensus target price stands at $15.97.

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