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Snap Gets Its Second Downgrade This Week

By Evan Niu, CFA – Jul 14, 2017 at 4:46PM

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The Snapchat operator has received two downgrades and one upgrade in recent days.

This week has been quite a roller coaster for Snap (SNAP 1.07%). Shares fell to an all-time low earlier this week in the wake of a downgrade from Morgan Stanley, which cited a handful of notable challenges that the company faces in growing its ad business. A couple days later, Stifel Nicolaus upgraded its rating on Snap, believing that the recent pullback represents "compelling upside if Snap executes on monetization."

Well, Snap just received another downgrade this morning, this time from Cowen (via Tech Trader Daily).

Snapchat logo

Image source: Snap.

Word on the Street

Cowen analyst John Blackledge reiterates many of the same concerns that Morgan Stanley expressed earlier this week. Namely, the company's development of new ad products is slow, while agile rival Facebook (META 1.23%) isn't letting up on the competition (or copying) anytime soon. Snap's direct response ad channel is also still in the early innings, which isn't particularly surprising but at the same time doesn't inspire a lot of confidence.

Reiterating another recurring theme, Blackledge notes advertising budgets on Snapchat are still largely experimental, as advertisers attempt to get younger demographics that are notoriously difficult to reach. Getting in front of those users is one thing, but actually engaging with them to take action on ads is another. The automated self-serve platform is also ramping quite slowly.

Blackledge has dropped his rating from outperform to market perform -- the equivalent of a hold rating -- while dropping his price target from $21 to $17 (the same as the IPO price).

Still a chance?

However, the analyst acknowledges that Snap's long-term opportunity is still "significant," but the road there won't be easy. The company will need to execute on user growth and engagement in order to realize that opportunity, which is "not a slam dunk." In fact, those areas will likely only get harder given the intensifying competition from Instagram Stories, which already has more daily active users than Snapchat.

Stifel's upgrade was in part based on a belief that investors are overly negative on social media companies due to Twitter's struggle in growing users. That negativity is bleeding over to Snap, according to Stifel, but isn't warranted. But Snap's user numbers speak for themselves, and it's hard to imagine Snap reinvigorating user growth in a meaningful way.

If anything, Facebook is only getting more aggressive, perhaps emboldened by the success it is already enjoying. Instagram is reportedly offering free trials, discounts, credits, and other ways to check out new ad products, according to Business Insider. Given its larger business, Facebook can better afford to offer aggressive promotions in order to lure away advertisers.

Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook and TWTR. The Motley Fool has a disclosure policy.

Stocks Mentioned

Snap Stock Quote
$9.40 (1.07%) $0.10
Meta Platforms Stock Quote
Meta Platforms
$115.33 (1.23%) $1.40

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