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Snap stock may be 125% overvalued and due for a crash

Brian Sozzi
The logo for Snap Inc. appears above a trading post on the floor of the New York Stock Exchange, Wednesday, Feb. 7, 2018. Nearly a year after its initial public offering and lackluster growth, the company behind Snapchat is making a comeback, calming investor fears that the disappearing photo and video app is a mere has-been destined to get trampled by Facebook. (AP Photo/Richard Drew)

It’s a 125% gain on pure hope.

That’s the heady appreciation in Snap Inc.’s (SNAP) stock this year as Wall Street bets for a turnaround from a disastrous 2018. In case you have been living under a rock, Snapchat lost millions of users last year amid a widely panned redesign to its popular disappearing photo, cat filter spewing app. The company hemorrhaged top executive talent. It lost a staggering $1.2 billion for the year.

Yet, here is Wall Street predicting big things for 2019.

Proclaims JMP Securities analyst Ron Josey, “Snap announced several new products and ad offerings at its first ever Partner Summit in Los Angeles on April 4, which we believe can ultimately improve the company’s engagement and reach among its 186 million DAUs and advertisers. We are encouraged with these new products and features, and the whole event, as it highlights Snap’s overall reach — it now reaches 90% of 13 to 34-year-olds — and continued innovation in social, messaging, and AR.”

Josey rates Snap’s stock a hold.

The upbeat tone on Snap following its latest partner summit is reflected elsewhere on the Street, that much is for sure.

“We attended the Snap Partner Summit in Los Angeles and come away more confident in Snap's outlook given (1) a confident tone among Snap executives at the conference that we have not seen since before the IPO, (2) increasing comfort that the Android app rebuild can improve performance and DAU growth, (3) strong innovation on core product (despite resources on the Android rebuild), which should drive engagement particularly in the core 13-24 U.S. user demographic,” said Deutsche Bank analyst Lloyd Walmsley.

Are these lads working for Snap’s communications team or aspire to?

Consequently investors —or more likely quick buck-seeking traders — have assigned Snap an exorbitant $16 billion market cap. Snap is still seen on Wall Street as posting losses this year and next, keep in mind.

This group could collectively be missing a key factor in their bullishness. Snap has to grow users, and now do so big-time given its inflated valuation. Doing so continues to be unclear with Facebook’s Instagram on fire and new social services such as TikTok taking off.

Snap may not attract the users it needs

For Snap to monetize its newest innovations, more users have to be on the platform. Again, a lot of new users considering how bulled up Wall Street is on the stock right now.

Hat tip to research outfit eMarketer for injecting a fresh dose of skepticism into the Snap Inc. bubble. eMarketer came out today and “significantly downgraded” its growth outlook for Snapchat’s U.S. social usage. For the first time, eMarketer believes Snapchat will lose monthly users in the U.S. this year. Growth is expected to flatten out and plateau in 2020.

eMarketer sees Snapchat’s U.S. users hitting 77.5 million this year, down 2.8% year-over-year. The firm previously expected 90.4 million U.S. users in 2019 when it made its last prediction in the third quarter of 2018.

As a result, eMarketer has significantly downgraded its growth outlook for Snapchat in its latest U.S. social usage forecast. For the first time, Snapchat will lose monthly U.S. users this year, with growth expected to flatten in 2020.

“Increased competition from new and existing social platforms is partly to blame for Snapchat’s decline,” said eMarketer senior analyst Jasmine Enberg. “But the product launches the company announced last week, including an in-app gaming platform, may improve user engagement and time spent, particularly among its core young user base. Gaming also provides a new revenue stream for Snapchat that could boost its ad business in the future.”

Instagram will pick up many of those leaving Snapchat, eMarketer thinks. The researcher estimates Instagram will grow its U.S. users by 6.2% to 106.7 million this year. Instagram is expected to add 19 million new U.S. users by 2023.

Snap Inc. fired back on the report by the afternoon after shares fell as much as 4%.

"The methodology of eMarketer’s recent forecast is flawed. The report does not factor in key recent developments at Snap, such as our revamped Android app, or reference our statement in February that we do not anticipate a sequential decline in our daily active user total in Q1 2019. Its user forecast is more than 10 million off from Snap's publicly available reach on our ad buying tool, its thesis is narrowly focused on the app redesign from over one year ago, and its methodology draws on self-reported survey data that's unreliable in our core 13-34 year-old demographic,” a Snap Inc. spokesperson said in an email to Yahoo Finance.

Cautions Morgan Stanley analyst Brian Nowak, “These [newest innovations] should create engagement opportunities, but material monetization of this new engagement is not as straightforward.”

Enjoy the momentum in Snap bulls. When the company reports its first quarter earnings on April 23, the story may change in a heartbeat — all 124% of it.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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