The rating of the stock of Snap Inc has been cut by Deutsche Bank analysts over the fact that despite the disappearing message company’s advertising technology improving, advertiser interest was waning. According to analyst Lloyd Walmsley, it would take some time before new products that had been developed by Snapchat could lead to an increased number of daily average users.
In a client note Walmsley added that estimates for the second half of this fiscal year might have to be reduced. Consequently the price target of the stock was lowered from $20 to $17, which was the IPO price of Snap Inc.
Daily user growth
Since the social media firm’s IPO in March the stock has fallen as a result of two quarters which produced lackluster results and insignificant growth in the number of daily users. The expiration of the lock-in period also contributed to the fall in the share price as insiders could now offload their shares.
Per Walmsley the long-term prospects of the social media firm are attractive since its advertising technology is improving and there is product innovation. In the short-term, however, advertisers lack an incentive to experiment with the company. Snap now has a hold rating after having previously had a buy rating.
From the moment Snapchat was founded, it became highly popular with teenagers and millennials due to its unique and innovative features. Facebook has however managed to successfully copy these features both on its main app and on Instagram and thereby diluting the effect these features may have had in attracting new users.
Deutsche Bank is not the only Wall Street that has a bearish view of Snap Inc as a result of the intense competition it faces from especially Facebook. Earlier in the month Michael Pachter, an analyst at Wedbrush Securities, gave the stock a neutral rating and set a price target of $12. Pachter argued that despite the popularity of Snap among millennials and teens, competition from Instagram would dim the prospects of the disappearing-message firm. This is because Instagram enjoys economies of scale being part of Facebook and therefore development resources can be deployed more efficiently.
Snapchat is also facing competition from localized apps such as Bike and Snow in Asia which have emulated its capabilities. These localized apps would also be an impediment to Snap’s global expansion ambitions as their feature sets and user bases continue to grow. Other competitors include Tinder, Pinterest and Periscope which have also copied some of Snapchat’s hallmark features.