Snap (SNAP) Stock Falls Following Analyst Rating Downgrade

Shares of Snap Inc. (NYSE:SNAP) dropped 4.7% to close at $14.59 on Jan 4, after the messaging application was downgraded to underperform from market perform by analysts at Cowen amid concerns over growing competition from other major social networks.

Per a survey conducted by the investment firm, 96% of the 50 U.S. ad buyers surveyed preferred Snap’s arch rival Facebook Inc.’s (NASDAQ:FB) Instagram Stories, a blatant copy of Snapchat’s feature of the same name, for advertisements compared to just 4% who backed Snap Ads.

Analyst John Blackledge of Cowen was quoted by CNBS saying, “On the whole, Snap was the lowest rated relative to other Social networks, given low relative marks on return on investment; targeting; and data, analytics and measurement."

Citing the results of the survey, Blackledge lowered his 2018 revenue expectations for the company by 15.4% to $1.1 billion. The analyst is also not hopeful about the company’s upcoming quarter results.

Notably, shares of Snap have lost 46.1% of their value since its listing date of Mar 2, 2017 against 23.2% growth of its industry.

What’s Hurting the Stock?

Snap’s growth depends on two key factors – user base growth and ad revenues.

Blackledge predicts the company’s “critical metric”, daily active users (DAU) to increase 16% year over year in the fourth quarter. However, we note that this would mark a 1% sequential decline.

Also, in the last reported quarter, on a sequential basis, DAU increased a meagre 2.9%, down from 4.2% increase in the second quarter and 5% in the first quarter.

Snap’s slowing user base and revenue growth rates are concerns. Analysts fear that the company’s growth opportunities could be dampened because of slowing growth in its user base as advertisers will no longer be attracted to the platform.

The company’s problem has been its sole focus on the younger demographic. Per the analyst, user engagement between the 18-24 age groups has gone up in the fourth quarter. The company undoubtedly is quite popular among that demography but its failure to attract the older generation (above 34 year olds) has been a major headwind.

Moreover, the latest redesign of the app is also a concern in the short run. CEO Evan Spiegel mentioned on the last conference call that given the uncertainty surrounding the app’s adoption, it is likely that the redesign will prove to be a headwind for the business in the short run. However, he believes that the redesign will have “substantial long-term benefits” and therefore the risk is worth taking.

Besides, growing competition from Facebook is a major headwind for the company. To boost its top line, Facebook is trying to lure users to all its platforms. Recently, Facebook revealed that it’s working to bring Instagram Stories to WhatsApp Status, which will make matters worse for Snapchat in our view.

Reportedly, at the end of November 2017, Instagram Stories and WhatsApp Status have more than 300 million DAUs each, almost double that of Snapchat’s total DAU and thus representing a larger canvas for advertisers.

Moreover, recently the suspension of all advertisements on Snapchat by Diageo (LON:DGE) PLC after an adverse ruling from the U.K. advertising watchdog –Advertising Standards Authority (ASA) –claiming Diageo’s failure to ensure that a campaign featuring its Captain Morgan rum brand wasn’t seen by users under the legal drinking age of 18, has been a major blow to the company.

Zacks Rank & Stocks to Consider

Snap carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are NVIDIA Corporation (NASDAQ:NVDA) and Micron Technology Inc (NASDAQ:MU) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for NVIDIA and Micron is projected to be 10.3%and 10%, respectively.

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