The Snap Inc. application (app) is displayed for a photograph on smartphone in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Snap Still Not ‘Out of the Woods’ Despite Second-Quarter Beat

(Bloomberg) -- Snap Inc.’s better-than-expected second-quarter revenue and a $250 million stake from Saudi Prince Alwaleed weren’t enough to calm concerns from Wall Street. Analysts instead focused more on the firm’s first-ever quarterly decline in daily average users and its cash burn. Analysts applauded the company’s decision to provide inaugural guidance, but say that third-quarter commentary suggests more pressure on user numbers.

“While we don’t believe Snap is out of the woods yet, headwinds from the redesign/shift to programmatic may be largely behind it, which could stabilize user and ad growth,” SunTrust’s Youssef Squali wrote in a report.

Snap fell as much as 8.1 percent at 10:14 a.m. in New York on Wednesday for its worst intraday loss in about two months. The stock reversed course from its initial jump in post-market trading Tuesday after the results and the Saudi investment were disclosed.

Here are some more takeaways from Wall Street analysts:

Jefferies, Brent Thill

“We welcome Snap’s willingness to provide guidance. However, the core business still has plenty of work left and the change in user interface led to the first ever decline in DAUs. Pricing declined 52% year-over-year and no real change to cash flow burn.”

“Longer term we like the move towards a programmatic self-serve platform for all ad-units, which will help to increase reach to a greater number of advertisers.... However, we expect near-term pressure on pricing to continue, which will weigh on top-line growth.”

“Now through all of social’s earnings, we highlight the trend of all three platforms having troubles on the user side. We wonder if this trend is social fatigue, or just short-term noise as safety, security and privacy are top of mind.”

Thill carries a hold rating on the stock.

Pivotal Research, Brian Wieser

Second-quarter results were "decent" with "revenues above forecasts driven by better-than-we-thought international trends (and worse domestic ones) along with guidance that was in-line with our prior expectations."

"Current period growth rates matter less than what current period data and commentary suggests about longer-term trends, which was incrementally negative vs our prior expectations."

"These results do not cause us to alter our longer-term view by much. We saw and continue to see Snap as a niche platform with a reasonably dedicated user base and a relatively novel advertising environment."

Wieser recommends selling the stock.

Susquehanna, Shyam Patil

“The 3Q commentary suggests further pressure on monetization and users and we believe makes out-year consensus numbers too high.”

“We remain skeptical on Snap’s prospects, as we see competition from Facebook’s Instagram, a saturated core demo (and a weak presence outside the U.S.), continued challenges with Android and lackluster ad products (with subpar ROIs) as continuing to pose challenges for the company.”

“Our checks remain overwhelmingly negative on Snap, and we believe the company will continue to find it difficult to fight for experimental allocations.”

“Looking ahead, Snap did not provide precise guidance for users, but cautioned that historically 3Q DAU growth rates have trended down year-over-year and quarter-over-quarter vs 2Q, pointing to more issues ahead.”

Patil carries a negative rating on the stock.

Wedbush, Michael Pachter

“Snap is burning cash at an alarming rate and needs to more than double its revenue
to reach cash flow break-even. Its user growth has stalled, perhaps temporarily, but
until we see signs of a return to user growth, it is difficult to forecast a turnaround in
the company’s profit picture.”

“Decelerating growth trends, fierce competition for user mindshare and advertiser
dollars, and a history of being hugely unprofitable keep us on the sidelines.”

Pachter rates the stock at neutral.

Stifel, John Egbert

“We think Snap’s user base has mostly stabilized following further app updates addressing many of its users’ concerns, ghosting a potentially more severe DAU disruption. Although Snap’s ad revenue growth has not blown investors’ socks off in recent quarters, the company is steadily improving its ad formats, buying tools, targeting and attribution and seeing major strides in international monetization.”

Egbert recommends holding the stock.

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