Snap Stock Upgraded: What You Need to Know

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Flat over the past year, and underperforming the S&P 500, Snap (NYSE: SNAP) stock continues to trade well below its $17 IPO price -- but there's good news, too.

Less than two weeks ago, Snap received an endorsement from analysts at Pivotal Research, who upgraded the Snapchat operator to buy with a price target of $17.25. The news was good enough to push Snap up 8% in a day, and now it seems investors may be treated to a repeat.

Upgrading Snap stock

This morning, analysts at Aegis Capital echoed Pivotal's endorsement, adding their own buy rating on Snap (this time with a $17 price target).

This is a curious development, as by its own admission, Aegis says that it has been "skeptical of Snap's ability to drive user growth, concerned that the ad platform was inferior to competitors in terms of targeting and analytics, and concerned that there was no clear path toward profitability and positive cash flow inflection." Accordingly, Aegis has refrained from rating Snap a buy ever since its IPO way back in March 2017 -- till today.

So what has changed?

Reasons for upgrading

"[I]ncreasing per-user engagement," "increasing advertiser interest," and "revenue expansion opportunities" are all working to Snap's benefit, argues Aegis, adding up to "improving" fundamentals for the stock that make it a buy. Additionally, says the analyst, Snap has so far managed to stay out of the headlines as regulators push to punish social media companies like Facebook for imperiling the privacy of user data, making it arguably a safer social media stock to invest in.

Backing up Aegis' thesis, although some analysts believe that Snapchat is losing ground to Facebook's Instagram, which has been growing user engagement, Snap management insists that its own "engagement trends" are positive "across the board."

In Q1, Snap reported that average revenue per user (ARPU) grew 34% in North America -- and twice that outside of the U.S. And while the company remains far from profitable, its cash-burn rate and operating losses both diminished significantly (down 71% and 19%, respectively) in the quarter.

At the same time, the company is exploring new revenue opportunities through a partnership with Zynga to offer a mobile "top-down multiplayer shooter" called Tiny Royale on its new Snap Games platform. And last month, The Wall Street Journal reported that Snap is in talks with music labels to license the use of songs in Snap posts -- perhaps hoping to mimic the success of TikTok.

What investors say

Admittedly, Snap's success is no sure thing, regardless of what Pivotal and Aegis may think.

Yes, revenue growth has helped Snap to limit its losses and turn down the fire on its cash-burn rate. But growing revenue even more by creating a gaming platform and licensing music are both likely to come with additional costs, which could imperil the cost-cutting success the company saw in Q1.

Accordingly, even though most analysts who follow the stock predict continued improvements on Snap's income statement over the next several years, the consensus (according to data from S&P Global Market Intelligence) is that the company still won't turn GAAP profitable before 2023 at the earliest -- and won't stop burning cash before 2022. Management may shed some more light on this timeline when it next reports earnings, but seeing as Q1 results came out only in late April, it's probably going to be another month or so before we get any additional details from executives.

In the meantime, most investors polled by The Motley Fool on our CAPS stock-rating service continue to give Snap the lowest possible one-star rating -- indicative of profound doubts about the company's future. (And shares are down more than 2% in morning trading today, despite the upgrade.)

Are these other investors right to doubt Snap's success, or are the analysts right to predict a comeback for the shares? Tell us what you think about Snap stock on Motley Fool CAPS.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FB. The Motley Fool recommends ZNGA. The Motley Fool has a disclosure policy.