Snap Inc. Shows “Impressive Turnaround,” But Stock Still Not A Buy – Analyst


Snapchat parent Snap Inc. is on the upswing as it prepares to report its quarterly financial results on July 23, with a resurgent stock at its highest level in nearly 18 months and a turbulent 2018 now in the rear-view mirror.

The positive momentum led Morgan Stanley analyst Brian Nowak to revise upward his projections for users, revenue and earnings and also up his 12-month price target to $13 from $9.

Despite all of that upbeat sentiment, Nowak has reaffirmed his “underweight” (sell) rating on the stock. He declared in a note to clients that the company’s “current fundamental improvements are more than fully priced into the share price.” He went on to write that Snap is “a relative laggard in our coverage and prefer to invest incremental capital in ‘overweight-‘rated Uber, Amazon and Facebook.”

It has been quite a ride for Snap investors. Amid significant turnover in the C-suite and strategic missteps from the latter part of 2017 through the end of 2018, the social networking company’s stock dipped ominously below $5 a share by last December. The ship has been righted to a large degree since, with recent quarters showing far more encouraging signs. Investors have sent shares up nearly three-fold in 2019 to date.

Nowak concedes the “impressive turnaround,” noting a “faster cadence of innovation.” Even so, Nowak offers some calculations intended to “sanity check” his updated $13 price target (a 44% jump from his previous mark). He looks at a five-year, discounted cash flow projection of earnings by 2024. That model predicts 23% growth in 2024 revenue. As Facebook is currently trading at a shade less than 12 times EBOTDA, Nowak reasons, “we would expect Snap to trade at a discount to Facebook, given 1) smaller scale, 2) lower margins and 3) an (expected) still smaller ecosystem, engagement and monetization opportunity.”

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