Snap’s (SNAP) improving ad trends, partnerships and technologies will drive revenue and earnings higher over the next two years but greenshoots are already reflected in the stock, analysts at Morgan Stanley wrote in a note emailed Wednesday.
The brokerage nearly doubled its price target on the stock to $13 from $7 and increased its 2024 and 2025 revenue targets by 4% and 6%, respectively. It also lifted projections on earnings before interest, taxes, depreciation, and amortization for those years by 43% and 31%.
Better near-term ad trends, artificial intelligence, China-based ad spending, and a third-party Amazon (AMZN) partnership that could drive conversion and pricing are positive trends for the company, according to Morgan Stanley’s report. The latter two factors are “the most material,” it wrote.
In Asia, Temu’s budget for global operating expenses, primarily consisting of advertising, is set to grow by 34% in 2024 to $5.9 billion. While Meta’s (META) Facebook will likely capture most of the US spend, Morgan Stanley believes Snap can capture a portion of the budget. Just 5% of Temu’s ad flows would contribute 1.3 points to Snap’s 2024 growth, it said.
However, Morgan Stanley reiterated an underweight rating on the stock, noting that improving trends are more than priced into current share price levels. After Snap underperformed its peers by 70% in 2023 through the third quarter, its share price soared around 90% in the fourth quarter. Snap and Amazon announced their partnership in November.
“The challenge now is that we think the stock has overshot how quickly the platform will turn,” the analysts said.
The digital pinboard’s revenue is seen growing at a 17% compound annual growth rate from 2023 to 2026, according to Morgan Stanley’s model. Yet, Snap is already pricing in a 30% CAGR through 2026, the analysts said.
“We struggle to push Snap estimates to these levels in a backdrop of 12.5% (year over year) overall US online ad growth,” Morgan Stanley said. Until there are more micro-level improvements, it “would rather buy Meta” trading at a more attractive multiple.