Snap shares fall below opening day price

Nina Agrawal
Los Angeles Times

Los Angeles — Snap Inc.’s stock market debut last week has been celebrated as a success in the tech world as the company’s share price surged in its first two days on the market. But that optimism doesn’t necessarily extend to Wall Street, where analysts remain doubtful of the company’s current value.

Snap shares opened at $28.17 on Monday morning, up about 4 percent from their price at the close of market Friday and up 66 percent from the $17 price paid by investors in Snap’s IPO last week. But by Tuesday afternoon, the price had sunk to close at $21.44.

That’s below Snap’s initial trading price of $24 but still well above what several Wall Street analysts believe Snap shares are worth.

Of eight analysts surveyed by FactSet who cover the stock, none has issued a “buy” rating for Snap, and all have set their fair value estimate or target price between $10 and $23, with the average at $16.50.

“It’s overvalued,” Brian Wieser of Pivotal Research Group, a financial analysis firm, said in a phone interview Monday. “That’s the simple answer.”

Wieser set the year-end target price for Snap’s stock at $10 and gave it a “sell” rating based on his estimates of the company’s future profitability. “To get to the (current) valuation requires willful optimism about the fundamentals,” he said.

In a report on Snap last week, Wieser pointed to the company’s high costs — which include hosting, serving and creating content, as well as sharing revenue with content partners — and its “sub-optimal corporate structure” with relatively inexperienced managers at the helm.

Analysts were also concerned about Snap’s ability to grow and to compete successfully with Facebook, which has 1.2 billion daily active users compared with Snapchat’s 158 million.

Laura Martin, an analyst with Needham & Co., said Snap’s narrow target demographic and bandwidth-intensive app limit its potential audience to young people in first-world countries.

Martin estimated the total size of that audience to be about 650 million, compared with the 3.6 billion for each Google and Facebook.

And even within its core demographic, Snap faces competition from copycats, Martin said Monday.

“If you’re a Snap shareholder, you get hit with all the failures as they experiment and then when they have a win, Facebook copies it,” she said. “They have no protection.”

Instagram, for example, launched its own version of Stories, a Snapchat feature in which users can post a sequence of photos or videos that are available for viewing for 24 hours, last August. Snap’s growth slowed sharply in the fourth quarter of 2016.

“The major risk for Snap is the possibility that its coveted demographic of younger users finds Facebook’s collection of apps more appealing than Snap’s and migrates over,” wrote Victor Anthony, an analyst at Aegis Capital Corp., in a report initiating his firm’s coverage of Snap last week.

Adopting Snap-like features doesn’t just mean Facebook can retain or attract young users. Advertisers, too, will stick with the platform.

“Large advertisers still view Snap as experimental,” said Anthony in a phone interview Monday, but they feel more comfortable with Facebook. “It’s a platform they know whose return is proven,” he said.

That’s a problem for Snap, which, like other social media companies, makes its money from advertisers, not consumers. The bulk of Snap’s $400 million in revenue last year came from selling ads that appear on the Snapchat app, and ads are expected to be the main revenue driver for the foreseeable future.

So how come the stock is still trading far above its $17 offering price?

“There’s a lot riding on the success of the Snap IPO,” said Anthony. After a drought of technology IPOs in recent years, investors are hoping this one will succeed and open the floodgates to other tech IPOs, Anthony said.

On top of that, institutional investors purchased about 15 percent of the shares available in last week’s IPO. Many of these investors have committed not to sell their shares for at least a year, Anthony said, meaning there’s a limited supply available, which drives up the price.