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Investing.com -- Wells Fargo downgraded Snap to Equal Weight from Overweight in a note Wednesday, citing rising expenses and slower-than-expected ad revenue growth as the company embarks on a period of heavy reinvestment.
The firm also cut its price target for the stock to $11 from $15.
“Solid revenue trends [are] not enough to outweigh [the] period of reinvestment, leading to meaningful cuts in our EBITDA forecasts,” Wells Fargo (NYSE:WFC) wrote.
The firm noted that full-year expense guidance implies 13-15% year-over-year adjusted operating expense growth, well above its prior estimate of 6% year-over-year growth.
This increase is said to be primarily driven by headcount investments and higher legal and compliance costs.
Snap’s app redesign, a key focus for management, has been slow to roll out and is unlikely to meaningfully drive engagement growth in FY25, said Wells Fargo.
“Simple Snapchat, now being tested in nearly all markets, reaches 25M+ users (only <5% of Snap’s MAUs),” Wells Fargo stated, adding that while the redesign has helped increase content consumption, it has not yet reversed engagement losses in Stories.
The firm did acknowledge some positive trends in ad revenue, raising its Q1 ad revenue growth estimate to 9% from 7%, and noted Snapchat+ Platinum’s launch ($14.99/month) could boost ARPU.
However, it maintained its FY25 total revenue growth forecast at 14% but lowered FY26 growth to 13.2% due to slower advertising growth.
Despite the downgrade, Wells Fargo highlighted a potential upside catalyst: a U.S. ban on TikTok.
“Estimate ~18% accretion to our Snap FY26 revenue estimate should TikTok be banned in the US,” the firm wrote, suggesting that if Snap captures just 5% of TikTok’s U.S. ad budget, it could drive a 15% upside to FY26 EBITDA estimates.
If a full ban materializes, Wells Fargo believes Snap’s share price could rise to the mid-to-high teens.