Snap Wins Back Wall Street Bulls Even as Facebook Threat Lingers

Wall Street thinks Snap Inc. is back in the game.

After a much-vaunted public offering in 2017, when the social media app was a hit with teens and young adults who flocked to its photo filters, disappearing text messages and "streaking" marathons, the stock began a steady decline. Bigger rival Facebook copied some of Snap's best features, pulling away users in that demographic gold mine, and an app redesign turned off many of the fans that remained.

The company suffered a stream of executive departures, and the stock tumbled almost 70% from its IPO price to late December, prompting a BTIG analyst to point out that virtually everything that could have gone wrong in its public life did.

Then came the rebound. The stock has more than doubled this year, bringing the company's market capitalization to more than $16 billion, buoyed by fourth-quarter results posted in February that blew past analysts' revenue expectations and showed a stabilization in user numbers.

Shortly after, shares got another boost when Snap said its highly anticipated Android redesign would be fully rolled out by the end of the year. Last week, Chief Executive Officer Evan Spiegel announced a slew of new products and services, including an expanded advertising network, improved augmented reality and camera features, a new video-game service and original shows.

Jefferies analysts visited Snap's new offices in Santa Monica, California, in March and came away "generally impressed" with the company's "positive steps" on the road to recovery. "It felt like it had grown up from a startup to a more mature company," Jefferies analyst Brent Thill wrote in a report following the visit, raising his price target to $11 from $9. He has a hold recommendation on the shares.

Even some of the most bearish analysts have changed their tune. Richard Greenfield, at BTIG, had downgraded Snap to sell in September before growing more positive three months later and raising the rating to neutral. As of last month, he had a buy rating and a price target of $15. It was one of at least two firms that upgraded their view on the stock, which now has six buy recommendations, 23 holds and nine sells, according to data compiled by Bloomberg.

RBC analyst Mark Mahaney said in a note Friday that the shares may have reached an "inflection point," upgrading his rating on the stock to outperform and raising his price target to $17, which would bring Snap back to its IPO level.

The stock rally, including a 3.6% increase on Monday to $12.27, compares with a 33% boost for Facebook this year and a 21% jump for Twitter Inc. Snap was down less than 1% in early trading in New York Tuesday along with the broader market amid trade concerns.

While Snap has been gaining steadily, investors seemed to be particularly keen on its expansion into video games. The move, which will allow the app's users to play games --those created by Snap, like Bitmoji Party, and other ones created by outside developers -- within the messaging section, should help make the app more "sticky" and keep people on it longer. Snap will also run six-second ads within the games, increasing the amount of revenue it can extract from 186 million daily active users.

Snap is clarifying its strategy, according to BTIG's Greenfield. "A couple years ago they were trying to be for everyone; now they're just focused on nailing their core demographic."

After its best ideas were shamelessly copied by Facebook and Instagram, Snap is once again being appreciated for the way it's able to differentiate itself. A renewed focus on making the app the "fastest way to communicate," and developing new, original content such as "The Dead Girl's Detective Agency," and "Endless Summer," are helping it stand out, RBC's Mahaney wrote in a recent note.

Still, while the market seems to be rooting for it, Snap still faces long-term uncertainties around the ability to significantly expand users and fend off competition, let alone turn a profit. Analysts don't see results in the black until the fourth quarter of next year, according to data compiled by Bloomberg. When the company reports first-quarter results later this month, it's expected to post a 33% gain in revenue - the slowest growth yet as a public company. And, Snap still needs to hire a chief financial officer, following the departure of Tim Stone in January, after only eight months on the job.

Analysts' agree that one of Snap's biggest hurdles is competition, for users' time and advertising dollars, where Facebook and Google dominate but smaller players like Twitter and Pinterest also compete. And Snap may never be able to win back some fans it lost when Instagram rolled out its own version of "stories." There's also skepticism as to whether Snap's new augmented reality features can sustain user interest, and how its foray into gaming will fare, given that Apple, Google, and Facebook have already entered the market.

"None of the products in our view will single handedly move the needle in terms of adding new users or drive user growth," wrote Jonathan Kees, analyst at Summit Insights Group. "Yet Snap's lock on the teenager/pre-teen group would allow it a unique advantage that its peers don't have."

Snap has bolstered its executive bench since rotating through heads of engineering, finance, product, sales, hardware and legal. The company recently hired Jeremi Gorman, formerly head of global advertising sales at Amazon.com, as chief business officer, and Jared Grusd, who was CEO of the Huffington Post and previously worked at Spotify and Google.

"When Snap hired Jeremi and Jared it was clear they wanted to be a real company and make money," said Michael Pachter, an analyst at Wedbush Securities. "The turnaround will be complete the day they turn a profit."

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