Snap Inc Stock Skyrockets In IPO, Analysts Say It’s Way Overvalued

Snap stock was priced at $17 per share for its initial public offering, but unsurprisingly, investors pushed it above $20 per share for its debut on the New York Stock Exchange today. Shares of Snap Inc (NYSE:SNAP) quickly soared past 85 million in early trading, making the stock one of the most active on major U.S. exchanges in morning trading. The stock skyrocketed by more than 40% in what is now the biggest IPO since 2014.

Snap Stock

It seemed some investors were so excited about the IPO and very confused about the name of Snapchat’s parent company, so they pushed shares of Snap Interactive higher —that is, until Snap Inc.’s IPO opened. Snap Interactive shares erased some of the 18% gains they picked up before Snap stock opened, falling by more than 7%.

Snap stock IPO priced at $17 per share

Snap Inc.’s valuation was $24 billion at its initial public offering price of $17 per share. Clement Thibault, senior analyst for the global financial platform, called this price “a stretch at best – and most likely one of the most overvalued IPOs in recent years.”

“With no timetable for profitability, vague growth prospects, and heavy competition, it is hard to see Snap Inc. justifying a $24 billion valuation in the near to mid term future,” he wrote in an email. “In order to thrive, Snap has to continue to innovate as well as pull in more users to its platforms. Which means high R&D expenses for the foreseeable future. However, the company also needs to be smart about its routes to monetization. Facebook, for example, was always profitable. Twitter still isn’t.”

Warnings about Snap stock

Thibault also warned about the threat from Facebook, noting that Snap isn’t suing the social network for infringement despite its blatant “copying” of Snapchat’s main features. He feels that this “speaks volumes” about Snap’s ability to defend “the innovation that makes it unique.” Further, if Facebook keeps copying its features, then any innovation it might be able to come up with won’t be worth much.

He also has concerns about Snap stock in general, as investors are plunking down cash without being able to influence the company’s direction.”

“The investment risk here doesn’t stem from the two founders’ youth, but from the nature of the shares Snap is issuing,” Thibault explained. The Class A shares that will be available to the public have absolutely no voting power whatsoever. Which means that buying these publicly traded shares means an investor would have a share in all the risk without having even the slightest say in how the company is managed.”

He advises long-term investors to steer clear of Snap stock until it becomes apparent which way the company is going.

Coverage of Snap stock initiated at Sell

Thibault isn’t the only one with severe reservations about Snap’s valuation. Pivotal Research analyst Brian Wieser initiated coverage of Snap stock with a Sell rating and $10 per share price target right after it became apparent that investors are going ga-ga for it. He called it “a promising early stage company with significant opportunity ahead of itself.” However, he also feels it’s “significantly overvalued.”

His reasoning is based on the probably scale of the long-term opportunity facing the company and also the execution risks on maximizing the opportunity. He noted that competition in the social media and messaging space is fierce, and the company’s user base isn’t growing much (think Twitter). Like Thibault, he’s also concerned with the lack of experience among Snap management, its high expenses and possibly dilution from stock-based compensation for employees.

Wieser is also concerned about the lack of voting rights for shareholders.

Snapchat engagement is going well

Despite the reservations Thibault and Wieser have about Snap stock, engagement data on its main platform, Snapchat, is strong. Data from Verto Analytics indicates that Generation Z, Millennials and Millennial parents are embracing the messaging platform, although it still is fighting to increase total user numbers. Even users over the age of 45 are using it, and Verto Analytics  ‘s data shows that Millennials spent almost 5.5 million days on Snapchat just in the month of October.

Image Source: Verto Analytics, Used with permission

In December, the average user in the U.S. spent almost five and a half hours on the messaging platform, compared to almost two hours on Instagram.

Image source: Verto Analytics, Used with permission

Facebook is still beating Snapchat in reach and stickiness, however, says Verto, even though Facebook-owned Instagram is lagging in usage.