Facebook Will Buy Snapchat, Analyst Says

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With Snap stock skyrocketing by 40% in the first couple days of trading, short-sellers were practically salivating at the prospect of shares becoming available to borrow. Tuesday was the first day borrowing could take place, and based on how bearish nearly every analyst is, it’s no surprise that millions of shares of Snap stock were out on loan within a few hours.

Despite this, there’s one analyst who’s absolutely convinced that Facebook will buy the Snapchat parent company—even though Facebook has been launching lots of its own Snapchat clones without owning Snap. So the question remains: why on earth would Facebook need to buy it?

A somewhat bullish view of Snap stock

In a research note dated March 9, FBN Securities analyst Shebly Seyrafi initiated coverage of Snap stock with a Sector Perform rating and $23 price target. That’s quite generous, considering how many analysts have a Sell rating or equivalent paired with much lower price targets. For example, Pivotal Research analyst Brian Wieser has a $10 price target on Snap stock and has been trumpeting his ultra-bearish view since at least the day of the initial public offering last week.

What Seyrafi likes about Snap is Snapchat’s strong performance in the 12 to 24 age demographic. He expects the company to boost its penetration in this age group from about 54% in 2015 to 75% by 2021. He said Omnicore data indicates that 71% of Snapchat’s users are less than 34 years old, and 45% are between the ages of 18 and 24. Capturing younger users should, theoretically, provide strength for the future, he notes, because they may continue to use the messaging app as they age.

Innovations and Facebook interest?

The analyst also feels that Snapchat has been quite innovative under the leadership of CEO Evan Spiegel. Product launches over the last few years have included Geofilters, Lenses and Spectacles, and Seyrafi describes himself as being “impressed” with the pace of innovation at Snap.

The biggest point in his research note was his certainty that Facebook must be interested in acquiring the Snapchat parent company. He estimates that the social network would probably pay at least $20 billion or $14 per share for it, which he feels puts a floor or “put” on Snap stock. He notes Facebook paid $21.8 billion for WhatsApp, which wasn’t generating “real” revenue even though it had more users than Snapchat.

He also lists a few reasons the company would be interested in acquiring it. One is that it offered $3 billion to buy it in 2013. The second is that Facebook could buy Snap because it has plenty of cash flow to pay for it. And the third is that doing so would take out “one of the few long-term threats to its business.”

But what we would question is why Facebook would even need to buy Snap. It’s been rolling out its own clones of Snapchat’s products over the last year or so, and bears have lined up the timing of the launch of at least one of those clones with a noticeable deceleration in user growth at Snapchat. Seyrafi admits that slowing user growth is a concern for Snapchat, but he seems so convinced that Facebook will acquire it that he isn’t overly concerned.

Short-sellers snap up Snap stock

Seyrafi is one of the few optimists when it comes to Snap right now, at least in terms of analysts, as investors seem quite enthusiastic despite all the dire warnings. Analysts at Astec Analytics said in their March 8 research note on Snap stock that they expected short-sellers to swoop in fast because of how much of Wall Street has much lower price targets on the shares. They were right, as by noon on Tuesday, the first day during which borrowing of Snap shares could take place, there were 3.3 million shares out on loan.

In fact, short interest was already so high that the borrow costs for Snap stock were among the most expensive “specials” on Wall Street. By 1 p.m. on Tuesday, there were nearly 6 million shares out on loan, and then by the end of business, short interest in the name had surpassed 10 million shares—even though the weighted average cost was “well into the specials range.” Some short-sellers were even willing to shell out “very high fees” just to borrow some shares.

RSUs aren’t investor-friendly

It seems short-sellers have lots to dislike about Snap. For example, the concern Wieser raised in his March 9 note was about the repeated use of restricted stock units for employees, which of course results in dilution for investors. He pointed out that the Snapchat parent issued $1.4 million in face value of restricted stock units per “average” employee in 2016.

Snap stock rose by as much as 0.44% to $22.91 during regular trading hours on Thursday.

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