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?
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.
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.
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.
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