Snapchat maker’s stock fall­ing — and it may drop even more

Austin American-Statesman - - BUSINESS - By Nina Agrawal Los An­ge­les Times

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 morn­ing, the price had sunk to just above $22.

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 band­widthin­ten­sive app limit its po­ten­tial au­di­ence to young peo­ple in first-world coun­tries. She 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.”

“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 last week.

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