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Snap shares downgraded on fears app redesign will slow user growth

  • In Snap's recent earnings report, both sales and daily active users — a key metric for Snap — fell short of consensus expectations.
  • "We downgrade shares of Snap Inc. to market perform from market outperform as we believe the pending app redesign could further impact daily active users," wrote JMP analyst Ronald Josey.
  • The company is tweaking its app largely to entice new users who currently find it difficult to use, including older people who find the current interface and multiple menus confusing.
Snapchat
Timur Emek | Getty Images

JMP Securities downgraded shares of Snap, citing sluggish user growth and potential risks from its app redesign.

The social media company reported worse-than-expected results last Tuesday. Both sales and daily active users — a key metric for Snap — fell short of consensus expectations.

"We downgrade shares of Snap Inc. to market perform from market outperform as we believe the pending app redesign could further impact daily active users growth," wrote JMP Securities analyst Ronald Josey in a note to clients. "With slowing daily active user growth relative to our projections, its pending product redesign—which should make the product easier to use—and uncertainty around advertiser demand and pricing, we step to the sidelines until Snap's daily active user growth stabilizes and advertiser demand ramps."

As a key indicator of app user activity, the number of daily active users is closely watched by advertisers when making decision on whether — or how much — to spend on Snap. The company added 4.5 million new users in the third quarter, nearly 60 percent below JMP projections and disappointing many others across the Street.

Shares of Snap have fallen more than 16 percent since the discouraging earnings report last week and amid a slew of critical analystnotes. The shares were down another 1.4 percent in premarket trading Wednesday following the JMP call.

CEO Evan Spiegel said during the recent earnings call that the upcoming app update will include major social media feed that focuses on friends and trending videos. The company is tweaking its app largely to entice new users who currently find it difficult to use, including older people who find the current interface and multiple menus confusing.

"Snap plans to redesign its core app with a focus on making it easier to use, surface more of its Discover content, and importantly, appeal to a broader audience," continued Josey, noting that users aged 35 years or more accounted for just 15 percent of daily users the fourth quarter last year. "We agree these changes are the right thing to do, but believe they are likely to further impact traffic growth, at least in the near-to-medium term."

This all comes as Snap transitions to an auction-based advertising system, whereby the company awards ad slots to the highest bidder from interested businesses. Though the popular photo sharing app saw the number of advertisers spending in the auction multiply by a factor of five since July, the key will be in scaling the auction to create stronger demand.