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Snap: $7 Target Turns Optimistic

May 02, 2018 5:35 PM ETSnap Inc. (SNAP)137 Comments


  • Snap reported disastrous Q1 results.
  • The company faces DAUs turning negative in Q2.
  • Snap continues to produce larger free cash flow loses.
  • A previous $7 price target is now far too optimistic.

All of the indications pointed toward Snap (NYSE:SNAP) disappointing the market with quarterly results. The social messaging stock did not disappoint with a disastrous Q1 report that places our previous $7 price target as now highly optimistic.

Source: Spectacles.com

User Revolt

The redesign of the mobile app got horrible views as highlighted in my previous research. Not surprising, the Q1 results continued to show a weakness in DAUs (daily active users). The sequential growth dipped to only 4 million users, but the scary part is the comment that DAUs were lower in March, though still above Q4 levels. Otherwise, Snap is now facing losing DAUs on a monthly basis.

When investors via the DAUs based on the reality that limited growth has occurred since Q3'16, the investment story turns highly bearish. Recode questioned the process to redesign Snapchat again and highlighted how DAU growth has struggled for quarters now.

Source: Recode

The bad part of the Snapchat redesign was the intent to place a higher focus on professional content. The content is needed to drive advertising revenue for a service generally designed for users to send private messages that aren't as easily monetized. If anybody has a data privacy issue, it is Snap with the service built around the concept of disappearing messages.

The company continues to optimize the redesign, but one shouldn't even approach the stock at mark value of $20.0 billion before the report. Even a nearly 20% loss places the market cap at close to $15 billion with 1.457 billion shares on a fully diluted basis.

The problem is that Snap actually still trades at a premium valuation considering revenues won't top much above $1 billion this year. At $7, Snap would still top a $10 billion market cap.

Cash Flow Nightmare

In the public markets, the only

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.

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