There's no pleasure in watching an ambitious, newly public company arrive at its first quarterly earnings release and completely shit the bed. There is, however, some pleasure to be had in watching bullish analysts rush in to pick through that beshatted bed for any shiny objects that may be lurking there. This is particularly true when those analysts come in large part from the banks that underwrote the company.
In the case of Snap, Inc, the schadenfreude is plentiful. A day after CEO Evan Spiegel assuaged investors by reminding them that the app can still make you look like a puppy, the banks that IPO'd the company continued to view it through a filter that makes dogs look like anything but.
Lead underwriters Goldman Sachs, Morgan Stanley and Deutsche Bank maintained Buy ratings (JPMorgan, the fourth lead, kept its neutral rating). Other underwriters, including Jefferies, RBC, Cowen, Citi, JMP, William Blair and Credit Suisse, wiped away the revenue and user growth misses and stayed bullish. After the stock dropped 22 percent overnight, Oppenheimer upgraded its rating from Perform to Outperform. Stifel and Barclays, to their credit, remained neutral.
Maybe these analysts are true believers in the thirst trap of Wall Street, whose current business strategy appears to be close your eyes and pretend Facebook isn't there. Or maybe the underwriting process was such a joyous experience that they can't bring themselves to dump on Spiegel and co. Or maybe Snap truly is on its way to world domination and the Society of the Spectacles is upon us. Who knows. The best we can offer is: Read below and judge for yourself.
While SNAP remains a near venture stage investment with all of the risks that implies, we continue to believe its audience and engagement represent a unique asset that will benefit from growth and diversification of internet usage and advertiser adoption as both mature.
1Q didn't bring the post-IPO rev/DAU beat investors were looking for, but we remain bullish about SNAP's rising engagement and the monetization potential of its user base. We are buyers on weakness (approaching IPO levels) and see execution into 2Q:17 as the next critical signpost.
We continue to believe in the management team's ability to innovate on product and ultimately grow and monetize the user base. Given the rich valuation, the company needed to show faster DAU growth to better validate the long-term potential. While nothing in this quarter was thesis changing in our view, each quarter the company fails to surprise with faster DAU growth is likely to result in option value decay.
Expected seasonality in revenue led to a Q/Q decline in ARPU, but we expect Snap to buck that trend as it has opportunities to increase ad load as well as offer advertisers better targeting capability.
Yes, SNAP will be the “Beta King” for some time. But that doesn’t obviate the reality that Snap has become an innovation leader – for both consumers & advertisers – in the single fastest advertising medium today – Mobile. It has also emerged as one of the leading Media Platforms for Millennials. We believe that if it sustains its current level of innovation, it can sustain premium growth for a long time and scale to profitability.
We expect the positive aspects of SNAP's 1Q17 report (North America monetization, hosting cost leverage) to be overshadowed by the revenue and DAU miss, as this was certainly NOT in the script for its first report as a public company. And although we would certainly have preferred to have seen higher DAUs reported vs. our expectations and a higher reset to BOTH our revenue and Adj. EBITDA estimates, we settle for profit dollars for now, and our long-term investment thesis has not changed on the back of this report.