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The Ratings Game: Why Snap’s pain may not be over yet

Snap Inc. continues to be in Wall Street’s doghouse, fetching another downgrade over the weekend to add to the pile it amassed late last week.

See more: Snap’s ‘grim outlook’ sends stock on near-40% skid, slaps other social names

In the wake of Snap’s

disappointing Thursday earnings report that highlighted deteriorating advertising-market trends, Wolfe Research analyst Deepak Mathivanan cut bait on the stock, lowering his rating to peer perform from outperform.

“While we generally refrain from reactionary [downgrades] following a bad print and a sharp selloff, we struggle to see a path for SNAP shares to outperform in the next 6-12 months given the confluence of headwinds faced by the company at this time,” he wrote in his note to clients.

Mathivanan worries about Snap’s competitive positioning in the ad market, especially in the wake of Apple Inc.’s

privacy-related changes that make it harder for the company to deliver measurable insights to marketers.

Opinion: Snap’s board creates a unique dividend meant to ensure its founders stay in control

Snap could feel a “pronounced impact,” in his view, if even a few big advertisers pull back their spending, despite recent progress to broaden the customer base. In addition, he thinks that Snap has focused more on top-of-funnel and mid-funnel advertising objectives to content with the Apple changes, but said that marketers concerned with the economic environment may drill down on bottom-funnel opportunities, which are easier to measure.

“Experimental spending is likely to be scaled down meaningfully,” Mathivanan said. “Similarly, spending on sub-scale platforms that require operational resources and investments for iterating and optimizing are likely to be paused or slowed down in a cost-constrained environment.”

Further, he sees limited visibility for the company given the macroeconomic environment and wonders if it is equipped to conduct a turnaround in the current climate.

“Our calculations indicate that Snap’s monthly ad revenues could be on a declining trajectory currently as advertisers across more categories pause spend in the light of a weakening macro environment,” he wrote. “As such, y/y growth rates have decelerated sharply, and it’s unclear if Snap has sufficient levers to reverse course without a favorable operating environment.”

Snap shares finished about flat in Monday’s session after plunging 39% Friday on one of its worst days on record. The stock has lost 79% over the past three months as the S&P 500

has fallen 17%.

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