That was quick.
Just days after going public, Snapchat parent company Snap (SNAP 2.89%) is already getting the cold shoulder from Wall Street. After jumping 44% and 11% on their first and second trading days, respectively, Snap shares are now down about 8% as the market starts to sober up from the IPO hype. That's likely because a handful of Street analysts have now picked up coverage and issued ratings, and they're not good.
Of the seven companies that have issued ratings, five have Snap at sell, and two consider it a hold, according to CNBC.
|
Firm |
Rating |
|---|---|
|
Needham |
Underperform |
|
Atlantic Equities |
Underweight |
|
Morningstar |
Sell |
|
Aegis |
Hold |
|
Susquehanna |
Hold |
|
Nomura Instinet |
Reduce |
|
Pivotal Research |
Sell |
Datat source: CNBC.
Many of the larger investment banks were underwriters in the deal, and as such are subject to longer quiet periods before they can officially initiate coverage.
Image source: Snap.
Word on the Street
The common theme underpinning nearly all of those ratings is a belief that Snap is currently overvalued -- by a lot. There are many valuation metrics that investors can use to gauge Snap, and all of them point to a stock that is woefully overvalued. Shares are currently trading at 72 times sales, for instance.
If you look at market cap per daily active user (DAU), Snap was trading at around $222 per DAU based on Friday's close, according to GGV Capital managing partner Hans Tung. Compare that to Facebook, which is trading near $325 per DAU, and you see a pretty big disconnect considering the fact that Snap is much smaller, much younger, and is still figuring out monetization.
Needham points out that Snap's addressable market is probably 80% smaller than the dominant social network. Pivotal Research thinks the risks are simply too great considering the expectations currently being priced in, and Aegis doesn't like that DAU growth is already decelerating in a big way.
The negative initiations are hardly surprising, since there's broad consensus that Snap's IPO was overvalued and overhyped. Presumably, Snap will get more favorable coverage from its underwriters, despite the Chinese wall that is supposed to stand between investment banking and research divisions.
In terms of operating metrics, Snap resembles Twitter far more than it does Facebook, and that's not a flattering comparison. On top of that, Snap closed out its first public trading day worth about 2.5 Twitters. It's quite difficult to imagine shares having much upside at current levels, as so much is already baked into the stock price that Snap would need to execute flawlessly for years just to justify the current valuation. On the other hand, it's far easier to foresee shares a lot lower within a matter of months.
