Is Snapchat's Stock A Buy After Stabilizing Its User Base? The Street Debates

Snap Inc (NYSE: SNAP) reported fourth-quarter results that came in better than expected and daily active users of 186 million marks stabilization from the prior quarter. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• Morgan Stanley's Brian Nowak maintains an Underweight rating on Snap with a price target lifted from $5 to $5.50.
• Bank of America's Justin Post maintains at Neutral, price target lifted from $7 to $8.40.
• Guggenheim Partners' Michael Morris maintains at Neutral, price target lifted from $6 to $7.
• Raymond James' Aaron Kessler upgrades from Underperform to Market Perform.

Snap traded higher by more than 20 percent at $8.55 per share Wednesday morning.

Raymond James: 3 Reasons To Upgrade

Kessler turned bearish on Snap's stock in January 2018 and a return to a neutral stance is based on three key factors:

• After showing stabilization in DAU trends in the fourth quarter the Android app redesign could usher in further improvements;
• Ad growth in the quarter was driven by the adoption of Snap's self-serve ad platform; and
• Expectations for continued top line growth and relatively flat opex could result in improved EBITDA performance.

Despite encouraging catalysts, Kessler said Snap's stock is trading at eight times 2019 revenue which is a premium to social media rivals at six times which "limit our enthusiasm."

Morgan Stanley: Uncertainty Remains

Snap's DAU in the fourth quarter was expected to contract by 4 million users from the prior quarter so a stabilization at 186 million users can be appreciated by investors, Nowak said in a research report. More important to Snap's investment story in 2019 is management's ability to notably increase its user base from the roll out of the new Android app.

Nowak said the company also deserves some credit for taking steps to improve its cost structure as non-GAAP operating expenses in the fourth quarter came in $17 million lower than expected and EBITDA losses were $15 million less than expected. However, the company is still burning around $150 million in cash per year so the case for no longer being bearish on the stock can't be made yet.

Bank Of America: Not A Victory

Investors concluding Snap's earnings report marks a "victory" are likely wrong but it does mark an "important step forward," Post said. Even though Snap showed stabilization in user trends, the company still lags its peers and the research firm's checks and surveys still point to high levels of churns.

User monetization improved by 32 percent from the same quarter a year ago to an average revenue per daily user of $6.33. The analyst said some of its peers are showing monetization rates that are three times greater, however, which suggests the potential for Snap to materially grow.

Related Link: Snap's CFO Departure 'Raises Additional Concerns,' Analysts Say

Guggenheim: 3 Topics Of Debate

Exiting Snap's print, bulls and bears will be debating three key topics, Morris said.

1. Will the Android app redesign result in the user base growing?
2. How will management control expenses while simultaneously investing in growth and operational efficiency improvements?
3. Is there room for further monetization improvement?

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