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Snapchat Parent (SNAP) Debuts as a Zacks Rank #3 (Hold)

Zacks Equity Research

On Mar 27, 2017, Zacks Investment Research assigned Snap Inc SNAP a Zacks Rank #3 (Hold).

The Story So Far: IPO

Snap, the parent company of social network, Snapchat, was off to a brilliant start on its debut. The company’s IPO was multiple times oversubscribed and shares soared 44% on the first day of trading.

Snap Inc. Price

Snap Inc. Price | Snap Inc. Quote

However, the shares took a hit following reports that the company has come under fire from several institutional investors, who have “approached” stock index providers S&P Dow Jones Indices and MSCI Inc to prevent Snap and other such companies that offer shares without voting rights from getting incorporated into these benchmark indexes. They weren’t happy with the company’s offering of 200 million Class A shares that carry no voting rights andargued that the absence of voting rights completely bars a shareholder from speaking on issues like a company’s growth plans or compensation shelled out to executives.

The absence implies that the company does not intend to dilute its decision making power. Snap will have a three-tier share structure and founders Evan Spigel and Bobby Murphy will have maximum voting rights through the ownership of Class C shares, which carry 10 votes per share. 

Barrage of “Sell” Ratings

At the outset, most analysts initiated coverage on Snap with a “sell” rating. These analysts argue that Snap has already started observing its average daily user growth rate slowdown.  Plus, the company is yet to make profits. Though the company’s revenues are on the rise, losses are ballooning. Reportedly, in 2016, Snap’s revenues of $404.5 million were nearly six times higher than 2015 revenues but net loss for the year increased 38% to $514.6 million.

Moreover, since Snapchat has just one source of revenues i.e., advertising, which only began in Oct 2016, it may be a concern for investors. In addition, it attracts a particular segment of the demography.

Analysts argue that teens are inclined to sudden changes in preferences. Media reports have quoted Snap “admitting” that increasing competition from big players like Facebook Inc FB, which have better resources, is a big threat as they can easily lure users to their platform. Since Mar 2, Snap shares have declined 2.66% as against 1.02% growth witnessed in Zacks Categorized Internet Software market. 

First “Buy” Rating

However, on Mar 20, 2017, Snap received its first Buy rating and target price of $25 from James Cakmak, an analyst from equity research firm Monness Crespi Hardt, who was quoted by media reports saying “We recognize we are potentially giving too much credit for unproven skills in building a business, rather than just a product, but we see more to Snap than many suggest.”

Following this, a few more analysts recommended the stock to public. They believe that product innovations might help Snap to sustain the momentum.

We believe the best part about the company is that it does not follow the usual advertising model of charging per click. Instead, it charges advertisers per day. The consistently expanding daily active user base has been attracting more and more consumers.

Apart from this, the company’s Snapchat Discover feature has enhanced its picture and video library, thereby attracting more and more advertisers. The feature also allows the company to partner with major events like the Oscars and Super Bowl. Discover currently accounts for a majority of the company’s advertising revenues.

At the Morgan Stanley conference held a couple of months back, CEO Spiegel was quoted by media reports as saying that 50% of its new user base now comprises users over the age of 25. Plus, Snapchat, in order to diversify its revenue base, has started selling Snapchat spectacles worth $130. 

Underwriters Assign “Buy” Rating

On Mar 27, 2017, Snap shares surged nearly 5% to close at $23.83 as at least eight underwriter banks including Citigroup C, Credit Suisse and Goldman Sachs GS, reportedly assigned a buy rating to the stock, given the monetization opportunities. However, other underwriters like J.P. Morgan  assigned “Hold” rating to the stock. Notably, it is mandatory for underwriters of the IPO to provideresearch coverage as well.  

The ratings have definitely baffled many as these go against the general Wall Street sentiment about Snapchat, i.e, a bearish outlook. There is an obvious hint of prejudice, however, Fortune has asked to be cautious as these underwriters have much more access to the inside information and thus ratings aren’t to be dismissed outright.

Conclusion

Snap is currently stealing all the limelight. It remains to be seen whether the company can keep the excitement alive by providing a more immersive experience. We can only hope that its success will not be “ephemeral” like its messaging features.

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