Why Snap’s pain may not be over yet

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Snap Inc. continues to be in Wall Street’s doghouse, fetching another downgrade over the weekend to add to the pile it amassed late last week.

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See more: Snap’s ‘grim outlook’ sends stock on near-40% skid, slaps other social names

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In the wake of Snap’s SNAP,
-0.10%
disappointing Thursday earnings report that highlighted deteriorating advertising-market trends, Wolfe Research analyst Deepak Mathivanan cut bait on the stock, lowering his rating to peer perform from outperform.

“While we generally refrain from reactionary [downgrades] following a bad print and a sharp selloff, we struggle to see a path for SNAP shares to outperform in the next 6-12 months given the confluence of headwinds faced by the company at this time,” he wrote in his note to clients.

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Mathivanan worries about Snap’s competitive positioning in the ad market, especially in the wake of Apple Inc.’s AAPL,
-0.74%
privacy-related changes that make it harder for the company to deliver measurable insights to marketers.

Opinion: Snap’s board creates a unique dividend meant to ensure its founders stay in control

Snap could feel a “pronounced impact,” in his view, if even a few big advertisers pull back their spending, despite recent progress to broaden the customer base. In addition, he thinks that Snap has focused more on top-of-funnel and mid-funnel advertising objectives to content with the Apple changes, but said that marketers concerned with the economic environment may drill down on bottom-funnel opportunities, which are easier to measure.

“Experimental spending is likely to be scaled down meaningfully,” Mathivanan said. “Similarly, spending on sub-scale platforms that require operational resources and investments for iterating and optimizing are likely to be paused or slowed down in a cost-constrained environment.”

Further, he sees limited visibility for the company given the macroeconomic environment and wonders if it is equipped to conduct a turnaround in the current climate.

“Our calculations indicate that Snap’s monthly ad revenues could be on a declining trajectory currently as advertisers across more categories pause spend in the light of a weakening macro environment,” he wrote. “As such, y/y growth rates have decelerated sharply, and it’s unclear if Snap has sufficient levers to reverse course without a favorable operating environment.”

Snap shares finished about flat in Monday’s session after plunging 39% Friday on one of its worst days on record. The stock has lost 79% over the past three months as the S&P 500 SPX,
+0.13%
has fallen 17%.

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Credit: www.marketwatch.com /

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