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Snapchat Loses Shine Post-IPO, Buy These Tech Stocks Instead

Zacks Equity Research

Snapchat parent Snap Inc. SNAP made a blockbuster debut on the New York Stock Exchange last Thursday. The stock opened at $24, 41.2% higher than its initial price of $17 and appreciated another 2% before closing its inaugural trading day at $24.48.

The stock was up another 10.6% the next day after CNBC parent NBCUniversal confirmed that it has poured $500 million in the company.

However, the impact of analyst initiations took the shine off the stock, which declined 12.3% at market close on Monday, bringing the stock below its opening price for the first time. Out of the seven analysts covering the stock, five gave it a sell rating on Monday.

What Went Wrong?

Despite having a strong user base comprising mainly millennials, heavy engagement, high brand value and an innovative approach to business, Snap’s total addressable market (TAM) is currently 80% smaller than that of Facebook FB. Moreover, the company has already reached 50% penetration of its TAM in the U.S.

Snapchat’s user growth rate has slowed down over the last few quarters. It added respective 21 million, 10 million and 5 million daily active users in the second, third and fourth quarters of 2016. 

Given its low market penetration and expansion opportunities and sluggish user growth, analysts believe that the stock is currently overvalued.

Other potential overhangs include lack of profitability, slowing monetization, fierce competition, inability to prevent replication of its best ideas and lack of experience with the management team.

Alternative Picks

Snap’s lost momentum doesn’t bode well for the investors. Here we pick few other stocks using the Zacks Momentum Style Score, which indicates when the time is right to grab a stock and benefit from its momentum with the highest probability of success.

Our research shows that stocks with a Momentum Score of 'A,' when combined with a Zacks Rank #1 (Strong Buy) offer the best upside potential in the short term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Here we present five such stocks.

Applied Optoelectronics, Inc. AAOI designs, develops and manufactures advanced optical devices, packaged optical components, optical subsystems, laser transmitters and fiber optic transceivers.

Four estimates for the current year moved higher in the past month compared to none lower. The Zacks Consensus Estimate also moved north, rising from $1.78 a share 30 days ago to $3.14 per share currently, up 76.4%.

Applied Optoelectronics’ earnings surprise history has also been impressive as the company has beaten estimates in each of the last four quarters with an average positive beat of 116.5%.

Applied Optoelectronics, Inc. Price, Consensus and EPS Surprise

Applied Optoelectronics, Inc. Price, Consensus and EPS Surprise | Applied Optoelectronics, Inc. Quote

Square, Inc. SQ offers financial services and marketing services. The company provides payments and point-of-sale, which include hardware and software to accept payments, streamline operations and analyze business information.

For the current year, five estimates moved higher while none was revised lower in the past 30 days. The Zacks Consensus Estimate improved from a loss of 33 cents per share 30 days ago to a loss of 25 cents per share, marking a 32% improvement.

Square has beaten estimates in three of its last four quarters with an average positive surprise of 23.3%.

Square, Inc. Price, Consensus and EPS Surprise

Square, Inc. Price, Consensus and EPS Surprise | Square, Inc. Quote

ON Semiconductor Corporation ON is a supplier of broadband and power management integrated circuits and standard semiconductors used in numerous advanced devices ranging from high-speed fiber optic networking equipment to the precise power management functions found in portable electronics.

Estimate revisions have been positive with 10 estimates moving higher in the past month compared with none lower. The consensus estimate also increased from $1.15 per share 30 days ago to $1.24 per share currently, an increase of 7.8%.

Over the trailing four quarters, ON Semiconductorhas beaten estimates three times, posting an average positive surprise of 13.3%.

ON Semiconductor Corporation Price, Consensus and EPS Surprise

ON Semiconductor Corporation Price, Consensus and EPS Surprise | ON Semiconductor Corporation Quote

Ebix, Inc. EBIX is one of the leading international suppliers of software and e-commerce solutions to the insurance industry.

For the current year, the consensus for EBIX has gone up by 5.2% in the past 30 days, thanks to one upward revision in the past one month compared to none lower. The company’s average positive surprise for the last four quarters was 14.4%.

Ebix, Inc. Price, Consensus and EPS Surprise

Ebix, Inc. Price, Consensus and EPS Surprise | Ebix, Inc. Quote

Perceptron, Inc. PRCP designs, manufactures and markets information based process measurement and guidance solutions, which help customers improve performance.

This stock has also seen estimates rise significantly over the past month for the current fiscal year backed by one upward estimate revision. The company’s average positive beat for the last four quarters was an impressive 131.2%.

Perceptron, Inc. Price, Consensus and EPS Surprise

Perceptron, Inc. Price, Consensus and EPS Surprise | Perceptron, Inc. Quote

To Conclude

The above-mentioned stocks have grabbed the spotlight with striking performances supported by solid earnings results and strong growth projections. With this in mind, we believe investing in these stocks will generate strong returns in the short term.

Want to learn more about Snapchat stock? Check out our recent podcast on SNAP with an IPO expert below!

Where Do Zacks' Investment Ideas Come From?

You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free >>


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Ebix, Inc. (EBIX): Free Stock Analysis Report
 
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
 
ON Semiconductor Corporation (ON): Free Stock Analysis Report
 
Facebook, Inc. (FB): Free Stock Analysis Report
 
Perceptron, Inc. (PRCP): Free Stock Analysis Report
 
Square, Inc. (SQ): Free Stock Analysis Report
 
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