The Ratings Game: Snap finds defenders after first revenue miss in seven quarters

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Snap Inc. shares are plunging 8% in premarket trading Wednesday after the company’s first revenue miss in seven quarters, but the stock found some defenders in the analyst community.

The company’s revenue shortfall seemed less to do with Snap’s SNAP, +4.11%  own business execution than with a weaker-than-expected ad market more generally, argued RBC Capital Markets analyst Mark Mahaney, perhaps owing to the shorter holiday shopping season.

See more on the latest numbers: Snap shares plunge on revenue, earnings miss

Results from Facebook Inc. FB, +2.76%  and Alphabet Inc. GOOG, -2.62% GOOGL, -2.51%  over the past few days indicated a similar dynamic, but Mahaney said the nature of Snap’s platform makes the company feel such impacts more acutely.

“As a smaller platform with few supply constraints (much more inventory than advertisers), a reduction in advertiser demand has a bigger impact on Snap’s head/premium inventory versus Alphabet and Facebook, where demand changes are more impactful at the tail end,” he said in a note to clients. “One positive is that Snap can soak up a major increase in advertiser demand without bidding dynamics undermining return on investment.”

He rates Snap’s stock at outperform with a $21 price target, writing that Snap is “still at an inflection point” with the potential for acceleration on revenue and user growth in the first quarter, judging by the company’s forecast.

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Bernstein’s Mark Shmulik was encouraged by the company’s better-than-expected user numbers in the latest quarters, which help soothe some of the concern, at least temporarily, about whether the rising popularity of TikTok is hurting Snap’s relevance with younger users.

“User growth is just fine, adoption is steady, and Snap appears to be doing a better job on engagement and churn management by delivering increasing utility,” he wrote. One important avenue for the company is monetizing the Discover content on its platform, though Shmulik acknowledges that “competition is going after these same minutes with similar brand-supported ad platforms.”

He sees room for the company to lift average revenue per user (ARPU) to peer levels, as management called out Twitter Inc. TWTR, +2.69%  as a good near-term benchmark on the metric.

“We estimate Twitter will print ~$6 per global [daily active user] in 4Q19E, a 2.4X lift from Snap’s $2.6 ARPU,” he wrote. “In North America, the headroom is even greater at 3.3X with current Snap ARPU of $4.4 versus Twitter at $14.7 in 4Q19E (again, our forecast).”

Shmulik has an outperform rating and $20 target price on Snap’s stock.

MoffettNathanson’s Michael Nathanson was also upbeat about Snap’s tone on monetization improvements. “Despite this quarterly miss, we walked away from Snap’s earnings more positive about the longer-term potential for the business, especially since management appears hellbent on closing the monetization gap vis-à-vis peers,” he wrote.

Nathanson argued that the company should be monetizing at roughly half of Twitter’s levels given that government data suggests expenditures for individuals under 25 are about 50% as much as they are for those aged 25 to 34 as well as those over 35.

“So, just for brand advertisers, Snap should monetize at roughly 50% of Twitter which has a broader demo base,” he wrote. “When taking into account Snap’s targeting capabilities for [direct-response] advertisers, as well as the scarcity of platforms to reach younger consumers, Snap’s relative ARPU compared to Twitter could be even higher.”

Nathanson has a neutral rating on Snap’s stock and a $20 price target.

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Evercore’s Kevin Rippey said the stock reaction proved another example of “good” Snap results getting “ghosted” by investors. He liked that the company gave a revenue forecast that implied a reacceleration in the first quarter and called Snap’s user-growth outlook encouraging.

“Summed up, in light of 4Q results and at these levels, we continue to like Snap, but the violent reaction to 4Q gave us further evidence that Snap is tough to play on earnings results,” he wrote. “Without an immediate catalyst, short-term investors moving to the sideline appear to overwhelm sources of immediate incremental demand. Just as occurred after 3Q, we see this selloff as a temporary discount.”

Rippey has an outperform rating and $20 target price on the shares.

At least eight analysts upped their price targets on Snap shares following the report, according to FactSet, and the average target now stands at $19.95, 5% above Tuesday’s close. Analysts are split on Snap’s stock: Of the 40 analysts tracked by FactSet who cover the shares, exactly half rate them a buy and the other half rate them a hold.

Shares have added 25% over the past three months, as the S&P 500 SPX, +1.50%  has gained 7.5%.

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