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Can Snap Stock Bounce Back After Last Week's 19% Drop?

By Rick Munarriz - Mar 12, 2017 at 7:06AM

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Snapchat's parent company takes a step back in its second week on the market, but it's still a successful IPO.

One of this month's hottest IPOs cooled off last week. Shares of Snap, Inc. (SNAP 9.19%) plunged 18.53% over the past five trading days, reversing a heady surge during its abridged trading the week it went public. Snap stock retreated after a couple of analysts issued neutral or bearish ratings on the stock and Facebook (META 5.10%) introduced Snapchat-like features to some of its products. 

It also didn't help that investors started getting cold feet after the prior week's scorching debut. The parent company of Snapchat was expected to price its offering between $14 and $16 earlier this month. Underwriters were able to generate enough demand to price the IPO at $17. Two trading days later, the stock was trading north of $27 for a 59% gain. A retreat is normal, though it actually wound up giving up nearly half of the prior week's gains.

Snapchat Memories featured on a smartphone.

Image source: Snap, Inc.

Wall Street chimes in  

Analysts who waited until this week to initiate coverage on the magnetic stock were generally underwhelmed.

  • Needham analyst Laura Martin tagged the shares with an underperform rating on Monday. She feels that Snapchat already has penetrated half of its addressable U.S. market, and that the platform's appeal is limited to just a fifth of Facebook's audience. She feels that the stock's value should be closer to between $19 and $23, which is essentially where the shares wound up by the end of the week. 
  • Victor Anthony at Aegis went with a hold rating and a $22 price target. His concern is that daily active user growth is decelerating sharply, slowing to just 3% year-over-year growth through the first two months of 2017. Facebook's Instagram is growing faster. 
  • FBN Securities analyst Shebly Seyrafi initiated coverage with a sector perform rating and a $23 price target. Seyrafi is also worried about decelerating user growth. Snapchat's inability to appeal to smartphone owners outside of the 12- to 24-year-old demographic group is also a concern.

Financial media also wasn't kind. Barron's ran a scorching piece this past weekend, suggesting that the stock is ridiculously overvalued. With Snap unlikely to turn a profit until 2019 at the earliest, the column's opinion is that even with heady growth, the stock should be in the low teens. Jim Cramer argued on CNBC's Mad Money that Snap stock will be lower in a year. 

The bearishness ran thick as the week played out. Bulls will be quick to point out that many pundits also knocked the stock just ahead of the IPO, only to see it skyrocket. The stock is now trading 30% above its $17 IPO price, not a bad haul over seven trading days.

Fear of Facebook

A popular feature on Snapchat is the ability to snap digital stickers on photos. Facebook's Instagram ripped that page out of Snapchat's playbook when it introduced stickers late last year. On Tuesday, Instagram rolled out an early version of geostickers. Folks in New York City and Jakarta can now add city-specific and even neighborhood- and landmark-specific stickers to their photos. 

Facebook's Messenger announced that it was introducing Messenger Day globally two days later. The new feature allows Facebook Messenger users the ability to share photos and videos as they happen with friends. Messenger Day posts disappear after 24 hours. 

Snap's IPO should help draw attention to Snapchat, and that may turn around the slowing user growth. Facebook and smaller rivals trying to steal Snapchat's thunder also isn't the end of Snap. Valuation will be a concern until monetization efforts pay off with profitable revenue growth, but Snap isn't going away. It had has double-digit percentage moves in its first two weeks on the market, and volatility will continue.  

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Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
SNAP
$14.38 (9.19%) $1.21
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$168.19 (5.10%) $8.16

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