Snap Inc. (SNAP) Stock Falls Below $20. What Next?

Snap Inc. stock closed below the $20 mark for the first time since its IPO. Is it time to sell SNAP stock? Or, is it a buy?

Snap Inc (SNAP) Stock Falls Below $20. What Next
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Venice, California, based Snap Inc (NYSE:SNAP), owner of the popular photo sharing platform, 'Snapchat' has now been listed on the NYSE for a fortnight. The company's life as a publicly listed company has been anything, but rosy. After opening at $24 on the IPO day, it has been all downhill for the newly listed company. Snap stock closed the last trading session at a price of $19.89, down over 17% from its IPO day open. This was also the first time the stock closed below the $20 mark following its IPO. With the SNAP stock price now approaching its IPO price of $17, what lies ahead for SNAP stock? Is it time to sell the stock? Or, have we hit the bottom?

Snap stock volatility

The short history of Snap stock can be summarized in just one word: Volatile. Snap stock price has ranged from $19.75 to $29.44 per share. That's a nearly 50% difference between the high and low, and that's in just 11 trading sessions. With respect to the opening price, the stock had risen 22.7% to its high before plunging to its first sub-$20 close. However, with the current Wall Street consensus target price for Snap stock sitting at $17.86, a further 10% lower than the latest close, Snap stock holders could be in for more pain.

No respite for Snap stock

As we had noted in our post-Snap IPO coverage, Wall street isn't too optimistic on the Snap story. And, well, the negative Wall Street commentary hasn't stopped, nor has the tone changed. The most optimistic commentary came from FBN securities analyst Shelby Seyrafi, who believes that a possible Snapchat acquisition by Facebook provides a floor for Snap stock price. However, we don't align with that thinking, especially not when Facebook (NASDAQ:FB) is going all guns blazing in its war against Snapchat. Yes, it looks like Facebook has a new purpose: to take down Snapchat. This is clear from Facebook's recent moves, where the company has launched features across its suite of apps, which till a few months ago, were the talking points for Snapchat users.

Infographic: Facebook Is Coming After Snapchat From All Sides | Statista

In our pre-IPO coverage of Snap Inc, we had also highlighted how the company's drop in user growth had coincided with the launch of similar features on Facebook-owned Instagram.

Snapchat user growth to taper?

When questioned on the reasons behind the apparent slowdown in user growth, Snapchat's management attributed the issue to problems with its Android app. As covered by a fellow Amigobulls writer, the business of Snapchat is to run an app, and if it can't do that effectively, it dents the Snap investment thesis. However, the management did try to play down the slowing user growth. Why? As Kurt Wagner from Recode explains it, "those close to Snap don’t seem concerned about user growth — in part because they don’t want you to be concerned about user growth, but also because Snap’s revenue growth isn’t necessarily reliant on driving new users. At least that’s the claim." Instead of a user growth driven revenue expansion, the company wants to focus on more money from its existing users. In other words, Snapchat is looking at ARPU (Average Revenue Per User) driven top line growth.

For those you unfamiliar with the terminology, ARPU and user growth are the two core drivers of revenue for an online platform. And Snapchat intends to focus on increasing its ARPU by focussing on markets with high ad concentration. In other words, does Snapchat expect its user growth to taper off? Well, that is a possible conclusion, which is scary, to say the least.

The fear of slowing user growth was also reflected in the recent analyst commentary. Analysts from three different investment firms were the latest to join the chorus against Snap stock. Cantor Fitzgerald's Youssef Squali believes that the current Snap valuations are 'rich under most scenarios' especially considering the 'unproven model with marketers.' The analyst initiated Snap stock at an 'underperform' rating and a $18 price target. Mizuho's Neil Doshi focussed in on Snapchat's user growth worries, initiating Snap coverage with a $20 price target and a 'Neutral' rating. The Mizuho securities analyst wrote, "We believe that Snap will need to execute on user growth/engagement to grow into this valuation. Snap's EV/DAU of ~$134 at the offering price of $17 is about 2.2x what FB paid for WhatsApp and about 4.5x what FB paid for Instagram. Those companies were growing users materially faster than Snap." MoffettNathanson's Michael Nathanson assigned Snap a $15 price target and a 'sell' rating. The analyst believes that the current valuations (7x 2020 Ev/revenue) set up Snap stock for a Twitter (NYSE:TWTR) like story rather than a steady rise from the current price levels.

Conclusion

Snap stock closed below $20 for the first time since its IPO. However, the chances for a turnaround appear bleak, given the possibility of tapering user growth and the continuous flow of negative Wall Street commentary. With Facebook piling on the pressure on Snapchat, we believe investors will be better off avoiding Snap stock for now.

Looking for tech stocks to buy? Forget Snap. Take a look at our top stock picks, which have beaten the NASDAQ by over 130%. If you're interested, we have also picked our favorites from the auto sector, which have beaten the S&P 500 by close to 170%.


Snap Inc Stock Articles & Video


Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and SNAP stock

user profile picture
flyncooley
bearish
I think a big question to ask it, "who are snapchat users?" - check out the instagram tag #snäpchat, its used by prostitutes, and people trying to lure others into their snapchat account with half naked and naked pictures (and graphic pornography videos, that instagram has to remove every night). Could be thousands if not 10s of thousands of fake accounts on snapchat that are used to take advantage of people, and minors. #snäpchat is not the only one #snäpme and many others are used because #snapchat has the most recent post hidden by instagram since its so graphic and offensive.

I think this is part of the reason that snapchat won’t provide real analytics to marketers, and why snapchat won’t go in-depth on its user demographics. They clearly have the money to build useful analytics tools into their platform, and they could share with the world if they had demographic stats that they were proud of. Sure makes it look like they are just hiding something. Also looks like they don’t care about marketers - they just want money from their discovery partners: CNN, Comedy Central, Cosmopolitan, Daily Mail, ESPN, Food Network, National Geographic, People, Vice, Yahoo! News and Warner Music - who pay numbers like $100,000 per day… doesn’t sound sustainable to me, seem like those big players will drop off eventually if they don’t feel they are getting a big return, or if they realize they are helping an app survive who’s user base includes thousands of people buying and selling sex, with snapcash no doubt. Seriously, Vice of all people, can you speak up already??? Come on Vice Magazine, you are better than this.

Aside from the quality, or a verification of the true number of “real” active users Snachat shows no signs of being able to make money for the long term. To try to make money they propose , “We may introduce significant changes to our existing products, or acquire or introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience” - Not only is this statement word for word form Facebook’s S-1 filing, it shows that their secret business model (made by an unproven leadership “team”) will be based on something that they are not experts at… why would anyone stand behind them? There are rumors that they want to build a phone… something Facebook also tried and failed at. And of course, they are a camera company now??? Competing against… well, you know companies with real experience making, perfecting, innovating, and marketing real technology.
3 1 reply
user profile picture
virendra
neutral
Hey Flynn,

Thanks for stopping by and also, for your detailed comment. You have pointed out some really insightful details and I think if its as bad as you say, then Snapchat investors should be even more wary.

Thanks once again.

Happy investing!
Do share this awesome post