The rough days continue for Snap Inc. (NYSE: SNAP) investors. Shares of Snapchat's parent company are sliding as analyst moves and problematic fundamentals weigh on the stock of the social multimedia messaging app.
Snap stock has been one of this year's bigger tech laggards, shedding nearly 40% of its value in 2018. The crummy performance follows a disappointing showing in 2017, when it went public at $17 and spent most of the year waffling about as a broken IPO. Let's go over three reasons for the stock's swift fall this summer.
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1. Snap’s second quarter was rough
Snap's latest financial results seemed impressive at first glance. Its 44% surge in revenue was better than analysts were targeting, and the same can be said about its narrowing adjusted deficit. Improving monetization was the key, as a modest 8% year-over-year increase in daily active users was boosted by a 34% spike in average revenue per user.
Guidance is where Snap's second quarter fell apart in the eyes of investors last month. Snap is eyeing $265 million to $290 million in revenue for the current quarter, 27% to 39% ahead of where it landed last year in the third quarter. But if it hits the low end of that range, we'll be eyeing flattish sequential growth. If Snap falls just shy of that range, it will be the first time — outside of the seasonally potent fourth quarter heading into the first quarter — that Snap checks in with a sequential decline in revenue.
2. Snapchat is still paying the price for its dumb redesign
Snapchat decided late last year that the key to jump-starting growth was a massive app redesign that would simplify the platform for new users. The move backfired. Users — a few celebrities among them — widely panned the update. By the time Snap began backpedaling on those changes, the damage had been done.
Snapchat is losing its audience. The problem with the 44% surge in revenue in Snap's latest quarter is that it masked the mere 8% year-over-year uptick in users and the outright sequential decline. Snapchat went from an average of 191 million daily active users in the first quarter to just 188 million in the second quarter. Snap's ho-hum guidance for the third quarter suggests the net defections will continue in the near term.
3. Wall Street is still unimpressed
Speaking more specifically to Wednesday's drop, three different analyst moves show Wall Street continuing to cool on last year's once-sparkling debutante. Rich Greenfield at BTIG is downgrading the stock to sell, slashing his price target to $5. He sees engagement trends continuing to deteriorate, and he now has doubts about the ability of Snap's CEO to innovate his way out of its current rut.
Citi's Mark May and Jefferies' Brent Thill also slashed their price targets on the stock to $8 and $11, respectively. Neither move is as severe as Greenfield now perched at $5, but all three have clearly lost faith in Snap as an investment. May at Citi no longer sees Snap as a buyout candidate, and Thill at Jefferies is eyeing problematic third-party data showing engagement continuing to trend lower in key regional territories.
Snap keeps going from bad to worse, and the stock is just riding the downward spiral of pessimism.
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