Snap Q2 Losses Widen But Revenue Increases; Target Price $28

Snap Inc, an American camera and social media company, reported that its net loss widened in the second quarter to about $326 million as the company suffered a blow from the COVID-19 pandemic, sending its shares down over 2%.

The camera company that develops Snapchat and Spectacles reported that its net loss rose to $326 million in the quarter ended in June, compared to $255 million in the previous year. However, the company’s revenue from advertisement sales surged over 15% to around $454 million.

The Los Angeles-based company said its daily active users (DAUs), a closely watched metric, increased by 17% year-over-year to 238 million in Q2.

“From a macro perspective, SNAP is benefiting from and driving the accelerating structural shift toward transaction/performance-related online ad spend. Essentially, we believe surging e-commerce and rising social commerce have caused an accelerating shift away from less measurable branded spend,” said Brian Nowak equity analyst at Morgan Stanley.

Given the uncertainties related to the ongoing COVID-19 pandemic and the rapidly shifting macro conditions, the company did not provide any expectations for revenue or Adjusted EBITDA for the third quarter of 2020.

Executive comment

“The growing focus on brand safety and privacy across the entire industry places us in a unique position of strength as we have invested in these areas from the beginning of our business,” Snap Chief Executive Evan Spiegel said during an earnings call with analysts, reported by Reuters.

“We continued to grow our community and business in a challenging and uncertain environment,” Spiegel said in a press release. “We are grateful that the resilience of our business has allowed us to remain focused on our future growth and opportunity.”

Snap stock forecast

Twenty-five analysts forecast the average price in 12 months at $25.66 with a high forecast of $30.00 and a low forecast of $16.00. The average price target represents a 3.72% increase from the last price of $24.74. From those 25, 17 analysts rated ‘Buy’, seven rated ‘Hold’ and one rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $25 with a high of $32 under a bull scenario and $14 under the worst-case scenario. Snap had its price objective boosted by Goldman Sachs Group to $29 from $25 and gave a ‘Buy’ rating on the stock. Evercore ISI raised the target price to $25 from $23;

Other equity analysts also recently updated their stock outlook for Snap. Deutsche Bank raised its target price to $28 from $24. Canaccord Genuity lifted their price objective on shares of Snap $25 from $15 to and gave the stock a ‘Hold’ rating. Bank of America reaffirmed a ‘Buy’ rating and set a $28.50 price objective. At last, Credit Suisse Group boosted their price target on shares of Snap to $28 from $18 and gave the stock an ‘Outperform’ rating.

We second Goldman Sachs and Bank of America on Snap stock outlook. We also think it is good to buy at the current level and target at least $28 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“How Big Is SNAP’s User Opportunity? We view SNAP’s primary addressable user market as global/North America internet users aged 13-44. We estimate 13%/39% of this demographic were on SNAP in ’16, reaching 15%/53% by ’20,” said Brian Nowak equity analyst at Morgan Stanley.

“How Big Can SNAP’s Ad Business Grow to Be? We see SNAP ad revenue growing as its engaged & millennial audience is attractive to advertisers. Monetization is still in its infancy and we see ad load growing as well. Innovation and improvements in the ad product are key to spurring forward growth. How Profitable Can SNAP Become? We don’t see SNAP generating positive adj. EBITDA until ’22, but expect healthy operating leverage and high FCF conversion once its ad business scales.”

Upside and Downside risks

Less than expected impact from COVID-19; Increased traction in international markets to drive faster DAU growth and ability to increase advertiser count/bid density driving monetization, Morgan Stanley highlighted as upside risks to Snap.

Inability to continue innovating could hold back user/ad revenue growth; Competition from FB, IG, and private players and a recession could cause advertisers reduce lower ROI/experimental budgets, pressuring ad revenue, Morgan Stanley highlighted as downside risks.