Why Snap Shares Fell Today

What happened

Shares of Snapchat parent Snap (NYSE: SNAP) fell 7% today after receiving an analyst downgrade from Wall Street. Citi cut its rating on Snap shares from neutral to sell.

So what

Citi analyst Mark May points to the poor reception among users of Snapchat's recent major app redesign, which could adversely impact user growth and engagement. The company's ad business would subsequently suffer as a result. Snapchat's redesign also played a part in Jefferies' downgrade of Snap shares just last month.

Snap is also in the midst of a transition with its creative ad tools business, which could hurt pricing and revenue in the short term as well.

Now what

May believes that Snap may return to capital markets in 2020 for additional capital, based on its current free cash flow burn rates and adjusted EBITDA losses. Shares had jumped following Snap's fourth-quarter earnings release, but the analyst notes that valuation was already looking stretched before that pop at 20 times forward sales. With shares trading even higher now, combined with the risks associated with the redesign, May is now recommending that investors stay on the sidelines.

In the long term, the redesign could help user growth and engagement, but it's still too early to call. The analyst is reducing his 2018 revenue estimate from $1.34 billion to $1.25 billion.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.