Snap Inc Versus Instagram: Tenacity Against Overwhelming Scale

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Snap stock plunged yet again on Tuesday, falling under the $15 per share mark for the first time ever, which will likely help it continue to be the best-performing short position. The company just added some new features to Snapchat, but it’s probably only a matter of time before Facebook copies those features too. Last week analysts from multiple firms issued bearish notes about Snap, including a report which points to troubling trends for Snap versus Instagram and even a huge downgrade from one of the company’s underwriters.

Snap stock rallies, but…

Snap stock rallied on Wednesday in a big way, climbing nearly 3% by lunchtime to surpass the $15 per share mark again. However, let’s not forget that Snap’s IPO price was $17 a share, and short-sellers have been having a field day with the company since the very first day its stock was available to borrow.

Ihor Dusaniwsky, research head at financial analytics firm S3 Partners, reports this week that Snap is their best-performing short position. The stock fell 11.1% last week alone and is down almost 50% since the IPO. In a note earlier this week, he pointed out how ironic it is that Facebook CEO Mark Zuckerberg is one of the biggest contributor to the company’s downfall because he tried to buy Snapchat in 2013. It seems that Snap management inadvertently created a nemesis when they refused to sell out. And thus we have Snap versus Instagram and Facebook today, with the latter repeatedly copying the former’s features.

According to Dusaniwsky, investors appear worried about whether Snap will be able to create an ad platform that’s able to “generate enough revenue to compete with more stablished social media companies.”

Did Snap just bottom out?

Morgan Stanley analysts downgraded Snap last week and cut their price target to $16 a share. The firm served as one of the underwriters on the company’s stock, and although the analysts that provide the ratings did not work on the underwriting, they may feel pressured to keep up appearances for as long as possible. Thus, their downgrade is seen by some as the ultimate insult, and CNBC’s Jim Cramer even called it an “obituary” for the social media firm.

Interestingly, Drexel Hamilton analyst Brian White said on CNBC‘s Squawk Box earlier this week that Snap appeared to be bottoming out. He even predicted that the stock could reach $30 a share and went on to draw comparisons between the Snapchat parent and Facebook. He noted that Facebook plunged 60% after its IPO before climbing. Snap was down 48% four months after its IPO, and White called it a “great buying opportunity,” adding that within the first three years after “high growth companies” hold their IPO, they “trade at nine to 22 times enterprise value to revenue.”

Snap versus Instagram: the ultimate battle

White also spoke to the battle of Snap versus Instagram and its parent company Facebook. However, he also explained that social media “doesn’t have to be a winner takes all.” However, a survey released last week by Piper Jaffray suggests that the social media fight may indeed be winner take all.

The firm’s bi-annual Teen Survey indicated that 90% of Snapchat users also use Instagram, which sets a firm base for the Snap versus Instagram fight. The firm’s analysts suggested that if Instagram is able to expand its use case, it could further reduce the uniqueness of Snapchat and limit Snap’s user growth.

Instagram, for its part, is proving that it is highly flexible, not only in use case but also in platform and even user base, according to Piper Jaffray. The firm’s survey focused on engagement modes on Instagram found that Instagram users are sending new and forwarded messages more and more, which results in continuing strength in user growth and continued interest from advertisers.

Lock-up period on Snap ends soon

Piper Jaffray cut its price target for Snap and boosted its target for Facebook, drawing a line in the sand on Snap versus Instagram following its surveys. Other firms have also slashed their targets for Snap recently, including Cowen. This demonstrates growing concern among analysts that the company won’t be able to defend against Instagram and its much stronger parent firm.

But there’s yet another reason to be worried about Snap stock. The lock-up period on employee- and insider-owned shares after the IPO ends on July 29, which means that some 900 million shares will be available to sell on July 31. The float currently stands at only 230 million shares, which means the float is about to get dramatically bigger. Snap is due to release its next earnings report on Aug. 10, however, which means that the lockup period is actually extended, possibly as far out as Aug. 14 for some insiders, due to blackout periods that typically surround earnings reports.

It’s very common for stocks to drop when the lock-up period ends after their IPO because insiders want to take some profits. However, CNBC’s Jim Cramer predicts that many Snap insiders will want to hold onto their shares, especially if they bought any shares in the IPO.

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