Snap stock is now down by about 16% after a volatile initial public offering that sent shares skyrocketing 40% and then tanking just a few days later. Most analysts are bearish on the Snapchat parent company and rate its stock as a Sell or equivalent. Among the problems that have Wall Street up in arms are the lack of voting rights attached to Snap stock, management’s inexperience, the high valuation, slowing user growth, growing competition, and the unproven business model, just to name a few.
Snap stock upgraded to Neutral
Interestingly, the Snapchat parent company has already managed to convince one analyst to upgrade its stock. CFRA Research analyst Scott Kessler said in a research note issue that although he predicts “considerable growth” for Snap, he still sees several problems with it. He upgraded Snap stock from Sell to Hold and set a generous price target of $22 per share, reports CNBC.
The issues he named are pretty much the same problems everyone else has with the company, including the lack of any kind of corporate governance, as the messaging firm’s earliest founders hold 89% of the voting rights. He’s also concerned about competition, especially from Facebook and Facebook-owned Instagram, both of which have copied Snapchat’s most well-known features without any apparent consequences.
Initiating coverage of Snap stock at Underweight
Cantor Fitzgerald analyst Youssef Squali initiated coverage of Snap stock in a note on March 14 with an Underweight rating and $18 price target. He said he finds the company’s valuation “rich under most scenarios,” adding that he just can’t make the numbers match up. He said even his revenue and profitability growth estimates are “aggressive” and assume that revenues will ramp over the next five years in a manner similar to what happened with Facebook. If that actually happens, he said it would be “impressive.”
He noted that Snap stock is trading at around 28.6 times EV/ revenue using his estimates for fiscal 2017, while the peer group average is only 5.5 times and Facebook’s multiple is 9.6 times. Further, he said that while Snap has negative EBITDA, all of the peers he used in his comparison group have positive EBITDA.
Snapchat’s growth is slowing… already
Squali also pointed out that Snapchat’s growth trends are slowing and added that it’s just too early for that to be happening. Growth in users and monetization accelerated in the first half of the year as the messaging platform launched new products in late 2015, but then both metrics decelerated later in the year. Most analysts have drawn the conclusion that Facebook’s copycat offerings have taken a toll on Snapchat based on the timing of the Instagram Stories launch and the deceleration in Snapchat’s numbers.
The Cantor Fitzgerald analyst will be watching the sequential daily active user and monetization growth throughout this year, as he said these two trends will determine whether Snap becomes the next Facebook or the next Twitter.
Underwriters yet to issue reports on Snap stock
One reason we’ve seen so much bearishness about Snap (aside from the many other issues) is because, as The Motley Fool pointed out, the investment banks that served as underwriters for the company’s IPO haven’t yet started issuing reports. There were more than 24 firms underwriting the offering, but none of them can issue any coverage of the stock until 25 days later. It certainly seems unlikely that any will set a price target below $17 per share because it would be like calling themselves out for selling the stock for more than what it’s actually worth.
One thing we would add is that these firms are supposed to have what’s called a “Chinese wall,” which basically means that the analysis arm and investment bank arm are supposed to be kept separate. Supposedly, the analysis arm won’t issue research that would benefit the investment banking arm, but last year Goldman upgraded Tesla just before an offering of Tesla shares was announced. And guess what? Goldman was underwriting that offering, which triggered a host of criticism as people called the firm out for a conflict of interest. The firm downgraded the EV maker’s shares months later.
Shares of Snap stock rose by as much as 1.27% to $20.78 during regular trading hours on Wednesday.
