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Snap Validates Turnaround Story But Results Don’t Awe Street

Ryan Vlastelica

(Bloomberg) -- Snap Inc. shares struggled for direction on Wednesday, following third-quarter results that were seen as supporting the view that the social-media company was seeing positive momentum, but which weren’t so strong as to warrant additional optimism after a strong year-to-date advance.

Analysts were largely positive on the results, with both JPMorgan and Needham upgrading their views on the shares, noting Snap’s continued success in growing both its revenue and its user base. However, after two blowout quarters from earlier this year, “the shock factor is wearing off,” according to MoffettNathanson.

Among the factors complicating the bull view was that Snap’s revenue outlook was seen as light, though analysts noted its history of being conservative with forecasts. Many firms also expressed valuation concerns after a massive rally, leading to some trimmed price targets.

Shares fluctuated between positive and negative territory in morning trading, and last traded down 1.5% on the day. At current levels, the Snapchat parent is up nearly 180% from a December low, but down more than 20% from a July peak. Should the stock close at current levels, it would represent the quietest reaction to a quarterly report in Snap’s history, according to data compiled by Bloomberg, based on the size of the one-day share reaction.

Here’s what analysts are saying about the results:

JPMorgan, Doug Anmuth

Upgrades to overweight from neutral; price target raised to $20 from $17.

“Snap’s platform and business have both improved dramatically over the past several quarters,” based on revenue growth and user trends, and this quarter “showed more encouraging trends.”

The stock is “at an inflection point” with Ebitda, and shares look “increasingly compelling” after recent weakness.

Needham, Laura Martin

A growing number of “always on” advertisers “creates a more stable revenue trajectory” and should improve Snap’s pricing power. Sees improved user engagement, along with better free-cash-flow and balance-sheet strength.

Upgrades to hold from underperform.

MoffettNathanson, Michael Nathanson

The results were “impressive” but “the shock factor is wearing off.” The focus is turning from user growth to how Snap can monetize the user base. “We question whether a story focused primarily on improving monetization...is enough to warrant the premium valuations seen just a few months ago.”

Neutral rating, price target raised to $14.50 from $14.

Morgan Stanley, Brian Nowak

The results “underscore the company’s better execution” this year.

Looking into 2020, Snap needs to show “more consistent” growth in daily active users and engagement, as well as improved ad tools. Recent successes reflect “a period of low-hanging fruit” in terms of its improvements, and “we look for more ad unit/targeting innovation to continue to move SNAP into the ‘must buy and highly measurable’ category.”

Equal-weight rating, $17 price target.

Nomura Instinet, Mark Kelley

In terms of adjusted Ebitda, the outlook “calls for break-even to a positive $20mn to exit the year, accomplishing the stretch goal to achieve break-even in 2019.”

Raises Ebitda expectations for 2019 and 2020, and lifts price target to $16 from $15. Neutral rating.

UBS, Eric Sheridan

The results showed “solid operating progress,” but continued forward execution is needed.

Neutral rating, $16 price target.

Jefferies, Brent Thill

The results show that Snap is “not a one-hit wonder,” and the trends in daily active users “shows the growth is sustainable.”

While the revenue outlook was slightly below expectations, “we assume conservatism given SNAP has beaten the high end of guidance” in the past.

“Fundamentally positive” on the stock, “but would wait for a pullback to get constructive.”

Hold rating, PT lowered to $17 from $18.

Susquehanna Financial Group, Shyam Patil

The company “continues to progress on its turnaround,” as seen by the “strong” results and the “generally solid” outlook, which looks “fine” as Snap is typically conservative.

Affirms neutral rating and trims price target to $16 from $18 “as the tempered outlook warrants a slightly reduced multiple.”

Loop Capital Markets, Alan Gould

The guidance suggests “slightly less robust growth in the current quarter,” although Snap’s outlooks have been conservative in the past.

Snap “should continue to benefit from the unduplicated reach it provides marketers in the core younger demos and advertisers’ desire to help build competition for the dominant internet platforms.”

The company “is growing nicely” and it should see positive free cash flow next year, but valuation is a concern at current levels.

Hold rating, $15 price target.

What Bloomberg Intelligence Says:

The outlook “raises concerns about the longevity of Snap’s story,” but sales have the “room to outgrow” the weak guidance. Improved ad pricing and higher engagement can help lift Snap’s average revenue per user, but it “needs to continue to deliver user growth to instill confidence in longer-term expectations.”

- Analyst Jitendra Waral

- Click here for the research

(Updates to market open in fourth graph, adds commentary from Needham and MoffettNathanson)

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm, Monica Houston-Waesch

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