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Wedbush upgrades Snap to Outperform, raises price target on confidence in turnaround

The analysts were confident Snap would ‘turn the corner sooner rather than later,’ benefitting from new executive leadership

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Snap is positioned to drive revenue growth and approach profitability off of its already quite large DAU base

Analysts at Wedbush upgraded Snap Inc (NYSE:SNAP), the struggling social media group that runs popular mobile messaging app Snapchat, to Outperform Tuesday while raising the price target to US$12.25 citing recent management changes and “improved execution.”

The analysts wrote in a note to clients that valuation “leaves room for upside,” driven by “multiple expansion” and potentially accelerated progress towards profitability.

“We are upgrading our rating on shares of Snap to Outperform from Neutral, while raising our 12-month price target to US$12.25 from US$11.50,” wrote Michael Pachter, Matthew Breda and Nick McKay in note to clients.

“Key hires and execution over the past six months suggest increased focus on shareholder value,” they added.

Snap brought in a new chief financial officer, Tim Stone, in May. Wedbush expects Stone to play a key role given that Imran Khan, Snap’s chief strategy officer and one of the few executives remaining at the struggling company since its 2017 public offering, is stepping down.

“The departure of Mr Khan makes Mr Stone both more visible and more vital in our view, and gives us confidence that corporate governance will improve and have a measurable impact on the development of and articulation of the company’s strategy,” wrote the analysts.

READ: Snap Inc says source code leaked; zips past 2Q revenue and profit estimates

“The addition of Kristin Southey as VP of Investor Relations (who previously spent 15 years at Activision, serving as VP of Investor Relations and Treasurer) professionalizes the IR function, and increases our confidence that a unified and clear message will be articulated to shareholders,” they added.

The analysts noted that free cash flow burn has continued, totaling US$234mln in the second quarter, up from US$229mln in the prior year quarter, despite a year-over-year revenue increase of US$81mln.

“These factors have made us reticent to recommend shares of Snap, particularly with the original management in place. The company has a significant opportunity to align its strategic priorities with those of its shareholders and to articulate those goals in a much more consistent and clear way,” wrote the analysts.

“In our view, the change in top management positions the company to significantly improve its execution, and its valuation suggests upside from current levels,” it added.

Investment Thesis

Snap zipped past second-quarter revenue and profit estimates. On a per share basis, Snap posted a loss of US$0.14 on revenue of US$262mln, which trounced Wall Street’s projection of a loss of US$0.17 per share on revenue of US$251mln.

But the company saw its daily active users fall to 188 million in the quarter from 191 million in the previous period. This figure also fell short of the Street’s projection of 192 million.

“Notwithstanding stalled daily active user (DAU) growth, it appears that Snap can continue to improve its ad targeting, and will likely continue to modestly grow ad loads and revenue without meaningful DAU growth,” wrote the analysts.

“The company has taken several steps to improve the utility of its app, increase user engagement, and explain its value proposition to advertisers, and we remain confident that Snap will turn the corner sooner rather than later, benefitting in particular from new executive leadership,” they added.

The analysts said shares of Snap Inc were currently trading only 2% above their 52-week lows, at a “current EV/Revenue multiple of approximately 8.0x the consensus FY:19 estimate” of US$1.60bn.

READ: Wall Street takes bets on Snapchat ahead of today's second-quarter earnings

“Current valuation appears to leave significant room for multiple expansion, as greater investor confidence in current management and the potential for earlier-than-expected profitability could drive the multiple closer to low double-digits,” wrote the analysts.

In their bullish case, the analysts wrote shares are “undervalued given Snapchat’s compelling content, immersive ad products, highly sought-after user demographics,” and long runway for growth.

Shares of Snap climbed 2.2% to US$9.95 on the bullish recommendation.

Contact Uttara Choudhury at [email protected]

Follow her on Twitter@UttaraProactive 

Quick facts: Snap Inc

Price: 19.26 USD

NYSE:SNAP
Market: NYSE
Market Cap: $27.84 billion
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