Morgan Stanley: We Overestimated The Chances Of A Snap Turnaround

Snap Inc SNAP reported weak third-quarter earnings results Tuesday, revealing challenges with monetization potential and user growth.

The Analyst

Morgan Stanley's Brian Nowak.

The Rating

Morgan Stanley downgraded Snap Inc from Equal-weight to Underweight, decreasing its price target from $14 to $11.  

The Thesis

New structural hurdles exist for Snap's core ad unit format, and competition from Facebok Inc FB is also a concern, Nowak said. (See Nowak's track record here.)

Morgan Stanley underestimated Snap Inc's monetization and engagement challenges and growing execution risks and overestimated the chances of a turnaround, he said. 

Snap Inc is unlikely to be able to monetize its core "tap-based" story product, Nowak said. Snap must improve its advertising offering to drive faster ad dollar growth, the analyst said. He lowered 2018 and 2019 ad revenue estimates by 9 percent and 10 percent, respectively.

Morgan Stanley did increase its adjusted EBITDA for Snap, citing the company's exercise of cost discipline.as the company is exercising cost discipline.

In the long term, the lower revenue base reduces Snap's long-term cash flow, Nowak said. 

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