Growth wor­ries chip away at Snap shares

Firm be­hind Snapchat app sees stock close near its low­est point since going pub­lic.

Los Angeles Times - - BUSINESS - By Paresh Dave

Snap Inc. shares closed Friday near their low­est point ever as in­vestors weighed what to make of con­cern­ing growth es­ti­mates and an im­pend­ing flood of new stock.

The Los An­ge­les com­pany that pro­duces the Snapchat app has ex­pe­ri­enced a rocky jour­ney on Wall Street since going pub­lic in early March. Though Snapchat has 166 mil­lion users and ad­ver­tis­ers are excited about the po­ten­tial to mar­ket to them, in­vestors and fi­nan­cial an­a­lysts aren’t con­vinced that growth will be as enor­mous or as steady as hoped.

The un­cer­tainty has fu­eled heavy in­ter­est in bet­ting on shares to fall and a big sell-off af­ter the com­pany’s first earn­ings re­port last month.

Snap’s low­est clos­ing price came the day af­ter that an­nounce­ment, hit­ting $18.05 on May 11. Shares ex­changed hands for $17.59 that day, the cheap­est

they’ve traded since the ini­tial pub­lic of­fer­ing at $17. It also was the busiest day for trad­ing Snap, ex­cept for the first two days af­ter the IPO.

On Friday, shares traded as low as $17.88 be­fore clos­ing down at $18.08, drop­ping 4% in the sec­ond-low­est close. The slide from a high of $29.44 in early March has cost Snap about $13 bil­lion in mar­ket cap­i­tal­iza­tion.

Tech stocks fell across the board Friday, with the tech-heavy Nasdaq com­pos­ite in­dex fall­ing 1.8%. Tech com­pa­nies have ac­counted for the bulk of the stock mar­ket's run-up this year, but fi­nan­cial ex­perts are mixed on whether prices are get­ting out of hand.

What be­came Snapchat launched in July 2011, and the young com­pany doesn’t have a long, demon­strated track record from which in­vestors can draw in­sights. But they can see down­load es­ti­mates and other data pre­dic­tions from re­search firms, which this week showed Snapchat was adding fewer users than In­sta­gram.

Snap has said its users are dis­tinct from the hun­dreds of mil­lions of peo­ple who use In­sta­gram. But if ad­ver­tis­ers fa­vor reach­ing a larger au­di­ence, they may grav­i­tate to­ward buy­ing com­mer­cials on In­sta­gram or Face­book in­stead of Snapchat.

Fears of such a pull­back in user growth and ad­ver­tiser spend­ing contributed to an­a­lysts at No­mura | In­stinet and Citi Re­search this week low­er­ing their ex­pec­ta­tions for Snap.

No­mura | In­stinet’s An­thony DiCle­mente low­ered his sales fore­cast for the cur­rent quar­ter to $173 mil­lion from $204 mil­lion and for the full year to $842 mil­lion from $953 mil­lion.

The an­a­lysts also re­fo­cused at­ten­tion on late July and early Au­gust, when Snap em­ploy­ees and other early share­hold­ers can be­gin sell­ing their stakes.

As part of an IPO, com­pa­nies typ­i­cally block such peo­ple from sell­ing shares for sev­eral months. In­sid­ers sell­ing too early can sug­gest a lack of faith in their busi­ness and lead other in­vestors to dump stakes too, which in­creases price volatil­ity — an is­sue com­pa­nies try to limit in the first few months af­ter going pub­lic. The num­bers of Snap shares el­i­gi­ble for trad­ing could grow five­fold be­tween July 30 and Aug. 29, DiCle­mente es­ti­mated.

“Should fun­da­men­tals de­te­ri­o­rate fur­ther be­tween now and the end of the lockup in Au­gust, we do not be­lieve that there will be de­mand to off­set the sub­stan­tial step-up in sup­ply, fur­ther pres­sur­ing SNAP shares,” he said.

Citi's Mark May noted that his short-term cau­tion about Snap didn’t change his belief that Snap in the long run can mod­estly in­crease us­age, sig­nif­i­cantly boost sales and start pro­duc­ing prof­its.

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