Snap's biggest bear says it's still 'crazy expensive' but breaks down why he's upgrading the stock

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Snapchat CEO Evan Spiegel.

• Snap bear Michael Nathanson of MoffettNathanson is slightly less bearish on the stock.
• Snap's rollback of its app redesign, upgraded advertising platform, Android app bug fix, and layoffs are the main factors contributing to Nathanson's upgrade from "sell" to "neutral."
• Still, Nathanson remains cautious on Snap.
• Watch Snap trade in real time here.

Snap's biggest bear on Wall Street is slightly less pessimistic on the stock.

Michael Nathanson of MoffettNathanson upgraded Snap from "sell" to "neutral" and raised his price target to $9 from $7. At his previous target, no other analyst on Wall Street was more bearish on the company.

While Nathanson says the stock is still "crazy expensive," he believes "several factors could potentially improve Snap's situation throughout the year." Those factors, he said, are Snap's rolling back of the app redesign, completion of its programmatic advertising platform, cleaning up of the Android version of the app, and its new organizational structure.

• The rollback of the redesign is happening. In the wake of the Snapchat redesign, more than 1 million users signed a petition on Change.org in protest, and several celebrity influencers, including Kylie Jenner voiced their displeasure with the new format. Snap's first-quarter earnings were a disaster, and showed that the redesign bore much of the responsibility for user numbers missing expectations. But management has been quick to recognize the perceived need to revert to the prior app layout. "Perhaps Snap woke up to reality when it saw its financial results," Nathanson wrote. Snap will move friend stories back to the right side of the app, and list friend contacts in order of most recent communication. Nathanson said both moves "address the two key complaints from our focus groups."
• Snap is almost done completing its programmatic ad platform. Snap previously had its sales team sign advertisers up one by one. That's old fashioned, and Nathanson said, "The model was hardly scalable." With the programmatic self-serve ad platform, the process is more efficient. "With this new ad model, Snap could tap into the long tail of small businesses, a valuable group of businesses that have fueled Alphabet and Facebook to market dominance," Nathanson wrote.
• Snap is fixing its Android app bug. Snap was originally built for IOS, so Android software had trouble supporting updates and crashes were frequent. But management is finally fixing the issue. "In third-quarter 2018, Snap plans to release a completely rebuilt Android app," Nathanson said. If the bug is fixed, Android users will spend much more time on the platform, which will boost ad impressions and touches and in turn boost revenue.
• Snap is trimming its employee headcount. Snap needed more horsepower to fix the Android bug, complete the new ad platform, and tinker with the app layout. Now, those projects are almost complete. Cutting the company head count cuts costs, but it also reflects that the company is ready for a more calculated approach to achieving growth. "Snap's decision to rein in costs despite faltering growth highlights a more measured approach to scaling the business," Nathanson said. "While 2017 was a year of investment, 2018 is starting off more disciplined with revenue growth exceeding expense growth for the first time in first-quarter 2018."

MoffettNathanson

Let's remember, Nathanson is still a bear on Snap, and the company still has a long way to go before it reaches significant profitability. "We do anticipate a rough second-quarter 2018 and are cautious on results for the rest of the year," Nathanson wrote. "We are happy to lock in the gains from our original Sell call on 3/16/17 and watch how things unfold from the sidelines."

Snap is down 28% this year.

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