Snap Slammed On Quarterly Results As Tencent Acquires A Stake
Analysts tore into Snapchat-owner Snap (SNAP) Wednesday after a third-quarter earnings report that missed estimates on many metrics, cutting their price targets on shares but holding mixed views on Tencent Holdings’ (TCEHY) move to get a 12% stake in the social media firm.
XAutoplay: On | OffSnap shares plummeted 14.6% to close at 12.91 on the stock market today. After the market close Tuesday, Snap reported third-quarter results that missed revenue estimates by a wide margin, while its chief executive acknowledged complaints that Snapchat is “hard to use.” The amount of daily active users Snap reported also fell short of views.
“Snap, Crackle, Flop” was the title UBS analyst Eric Sheridan gave his research note to clients Wednesday, as he was among those who gave the harshest reviews. Sheridan lowered his rating on Snap to sell from neutral and dropped his price target to 7 from 12.
With the first two quarters as a public company, Sheridan framed Snap’s disappointing results as “growing pains,” with debates around growth in users and its ad business left unsolved.
“While many of those questions remain unanswered after a third earnings report, it is now very likely that Snap will continue to struggle on multiple fronts in the coming 12 months,” Sheridan wrote.
Others cutting their price targets included RBC Capital Markets analyst Mark Mahaney, who went to 15 from 20 and lowered his rating to sector perform from outperform. Cowen analyst John Blackledge cut his target to 12 from 14, with a market perform rating. And Credit Suisse analyst Steven Ju cut his target to 17 from 20, saying Snap turned in “another messy quarter.”
With its quarterly results, though, Snap announced that Tencent and its affiliates had acquired about 146 million shares of nonvoting Class A common stock via open market purchases. Tencent is one of China’s largest internet companies and is the leading provider of messaging services with its WeChat app.
Piper Jaffray analyst Sam Kemp in a note to clients said Tencent’s purchase was not a “thesis changer” for several reasons.
“We do not believe that Tencent would be able to acquire Snapchat as the result of Snap’s capital structure (95% of voting rights being owned by the co-founders),” Kemp wrote. He maintained a neutral rating on Snap and price target of 12.50.
FBN Securities analyst Shebly Seyrafi held a different view on the Tencent deal.
“Although this is understood to be a passive stake, Tencent could increase its stake materially in the future,” such as what Tencent did with the gradual acquisition of Riot Games, he wrote in his morning note.
Seyrafi added that Facebook (FB) might also now be interested in taking a closer look at Snap. Prior to Snap coming public, Facebook twice made an acquisition offer, according to reports.
IBD’S TAKE: After going public in March, Snap shares have declined generally, struggling in the face of competition from Facebook. Shares reached a peak of 29.44 on Snap’s second day of trading and have dropped ever since. Snap is ranked 30th in IBD’s Internet-Content Group.
Seyrafi thinks Facebook could become interested in acquiring Snap now that shares have fallen below $14. Seyrafi previously said that’s the threshold by which Facebook could be interested in a deal.
“Now that Facebook has, in effect, made Snap ‘cry uncle’ by acquiring many of the latter’s innovative features, Snap could be more amenable to a deal with Facebook, Tencent, or another company that wants to increase its social media presence,” Seyrafi wrote. He reiterated a sector perform on Snap and price target of 15.
Facebook reported third-quarter results on Nov. 1 that topped earnings and revenue estimates by a wide margin.
GBH Insights analyst Daniel Ives maintained a rating of attractive on Snap but lowered his price target to 18 from 17. Tencent’s investment shows “there is clear, inherent value in the company’s 180 million daily active users, strong engagement numbers, and growing international social media platform,” Ives wrote in a research note to clients.
“While it would have been easy to throw in the white towel this morning after a disastrous third-quarter earnings report, we believe Snap will be able to ultimately get through this painful transition phase and exit a healthier platform,” Ives wrote.