Vehicles pass in front of a Snapchat Spectacles by Snap Inc. pop-up store in New York, U.S. (Photographer: Saul Martinez/Bloomberg)

Snap Plunges as Wall Street Blames Earnings Flop on Redesign

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(Bloomberg) -- Snap Inc. sank 21 percent to a record low after reporting first-quarter sales and daily active users that missed estimates. At least three analysts cut their ratings, as Wall Street laid blame on Snap’s controversial app redesign and said management must act quickly to keep users from fleeing to Facebook Inc.’s Instagram.

Deutsche Bank (Kunal Madhukar)

  • “Snapchat risks losing its cool status with users frustrated by the redesign, which makes advertisers increasingly unlikely to put money into Snap advertising without clear return on investment”
  • Not clear why the app redesign was rolled out broadly, and even less clear why it hasn’t been more aggressively rolled back already
  • “Luckily engagement remains strong” so the company has a core base of users and can turn things around
  • Given intense product and monetization competition from Instagram, Snap has to move fast to change the narrative, particularly given its cash burn levels
  • Hold, price target cut to $12 from $15

Summit Insights (Jonathan Kees)

  • Says management has its work cut out for them
  • Sees business in flux and facing rampant issues including reining in costs, competition with Instagram, and tapped-out market of pre-teens and teens
  • Cuts to sell from hold, price target to $10 from $16

Oppenheimer & Co. (Jason Helfstein)

  • Most recent app redesign seems to have been “last straw” for some advertisers, who are now unlikely to give platform another chance absent significant daily active user re-acceleration, and there’s no catalyst in sight
  • Ahead of clear evidence of consistent growth, near-term bull case is a buyout offer from largest shareholder Tencent; however, does not see management agreeing to sale
  • Continues to believe Snap garners high user loyalty and levels of engagement but notes stock trading at higher price-to-earnings ratio than peers
  • Cuts to perform from outperform, removes $19 price target

Credit Suisse (Stephen Ju)

  • Confluence of headwinds including a negative consumer reaction to the app redesign, marketer hesitation following the appearance of problematic ad content, and the transition of lenses/filters all led to shortfall versus estimates
  • Historical problems Snap has had with its Android app were only compounded after the redesign, which also drove a miss on daily average users
  • Snap shares return to being a “show-me story” on user recovery as company hits reset button on the redesign as well as the release of the completely rebuilt Android app
  • Ramp in monetization likely to be delayed into late second half of the year; sees upside potential but further patience may be required
  • Outperform, price target cut to $16 from $21

Morgan Stanley (Brian Nowak)

  • Lower-than expected-daily active users and forecast speak to the still-existing challenges Snap faces in turning its business model around; says headwinds to monetization continue into second quarter
  • Discount is warranted given Snap not only has lower margins than the rest of the peer group, and also does not expect it to generate positive cash flow until 2022
  • Looking for signs of normalization in user engagement across iOS and Android devices and increased appetite from advertisers, particularly as Snap transitions its Creative Tools products to an auction-based market
  • Underweight, cuts price target to $8 from $12

Piper Jaffray (Sam Kemp)

  • Revenue and user metrics were weak, most importantly in North America; management commentary implied U.S. daily average users declined on an absolute basis throughout first quarter and second will experience further revenue deceleration
  • “Snap is a poorly structured company that is demonstrating a clear pattern of mismanagement. We think the negative news cycle around Snap will continue and advertisers will likely continue to approach Snap skeptically”
  • Sudden rush to profitability could impair its ability to properly invest in improving its struggling product; meanwhile, Instagram continues to grow rapidly, deploying stronger ad tools and expanding its use case
  • Neutral, cuts price target to $11.50 from $17

Evercore ISI (Anthony DiClemente)

  • Snap’s earnings “missed estimates across the board”
  • Redesigned app “created a number of challenges which may prove difficult to overcome, particularly as competitive pressures from Instagram continue to build”
  • Cuts to underperform from in-line, price target to $9 from $13

©2018 Bloomberg L.P.

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