Snapchat Update Is a Big Problem for Snap Stock

Snap Inc (NYSE: SNAP) stock surged more than 40 percent in the opening weeks of 2018, lifted by huge revenue and user beats in the fourth quarter. But the stock is already down more than 7 percent this week on concerns about the company’s recent app overhaul.

Following the Snapchat app update, users are complaining that the latest version makes it more difficult to see friends’ stories. Early reviews of the update in targeted international markets were 83 percent negative, according to TechCrunch. That negative opinion has now moved to the U.S., where nearly 1.5 million people have retweeted a petition asking for Snap to go back to the previous version of its app.

The app was redesigned to be more user and advertiser friendly, a move that investors hoped would boost user engagement and advertising revenue. Unfortunately, Citi analyst Mark May says the poor reviews could be the first step toward a drop in engagement for Snap.

“While the recent redesign of its flagship app could produce positive long-term benefits, the significant jump in negative app reviews since the redesign was pushed out a few weeks, which could result in a decline in users and user engagement and could negatively impact financial results,” May says in a downgrade note. “The near-term transition of its creative ad tools to self-service could pressure pricing and create additional revenue headwind and possible [earnings] estimate risk.”

May also says that, while Snap impressed the market with its fourth-quarter revenue beat, the company’s earnings losses and negative free cash flow worsened year-over-year. Citi expects Snap to burn through at least another $3 billion in cash before reaching the break-even point on free cash flow, a burn rate that would require a significant capital raise between now and 2020.

Snap stock recently traded at an estimated 20 times its forward revenue, making it one of the most steeply-valued stocks under Citi’s coverage.

Still, Bank of America analyst Justin Post says Snap’s latest quarter was good enough to give the company the benefit of the doubt, at least for now.

“While competitive concerns remain, we think Snap has weathered significant competitive pressure in 2017 with growing time spent, and could see improving user trends in 2018,” Post says.

Bank of America has…

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