Bizarro World: Upgrading Snap And Downgrading Alphabet

Upgrading Snapchat's SNAP while Downgrading Google's Alphabet doesn't make sense (yet). We welcome you to the Bizarro Superman edition of the Samadhi Brief, where we break down a few choice tech sector coverage updates.

Snap initiated as a Buy

Analyst firm Monness, Crespi, Hardt & Co. (MCH) awarded Snap, Inc. (NYSE: SNAP) with its first Buy rating. MCH acknowledged "substantial execution risk," yet balanced that against the known efforts of SNAP's competitors and set a $25 price target. Drexel Hamilton jumped on the "Snapwagon" and upped MCH with a $30 price target.

Bottom line: In defense of its Buy rating, Drexel Hamilton cites SNAP's impressive penetration of the millennial user demographic and notes that SNAP is unique enough (as a camera company) that it "should not be pigeonholed in a particular industry."

While we agree that SNAP is somewhat unique, and dominates certain age groups (it owns over 70% of the US market for the 18 to 24-year-old bracket), we disagree on SNAP being unique enough to avoid direct competition. A recent study by RBC Capital Markets, for example, finds marketers achieving "little return" on Snapchat when compared to Instagram - which just eclipsed one million active advertisers - and, to a lesser extent, when compared to other Facebook (Nasdaq: FB) properties.

We agree with RBC, and believe SNAP has yet to prove it can significantly increase its ARPU (average revenue per user) to match the revenue potential of Facebook. We're still identifying the triggers that would make SNAP a compelling investment and will advise in future updates.

Pivotal Research Downgrades Alphabet from Buy to Hold

Citing potential issues with global brand quality associated with ads placed on YouTube content, Pivotal Research has downgraded Alphabet (Nasdaq: GOOG) (Nasdaq: GOOGL) from Buy to Hold and lowered its price target to $950 from $970.

Bottom line: GOOG has publicly apologized for allowing a series of objectionable paid advertisements to appear alongside YouTube content. These ads have led to a series of entities, including L'Oréal, McDonald's (NYSE:MDC), Honda (NYSE:HMC), Toyota (NYSE:TM), Havas (OTC:HVSYY), the British government, retailer Marks & Spencer (OTCQX:MAKSY), financial firm HSBC (NYSE:HSBC), Verizon (NYSE:VZ) and AT&T (NYSE:T) to suspend advertising campaigns from YouTube and/or non-search-related GOOG properties.

As the UK is GOOG's second largest non-US market, and the global brands participating in this "suspension" has grown, the issue has garnered significant media attention. However, we do not anticipate material long-term financial impact at this point for the following reasons:

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