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Can Snap Stock Bounce Back After Last Week's 11% Drop?

By Rick Munarriz – Updated Jul 16, 2017 at 6:31PM

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Snapchat's parent has another rough week, hitting new all-time lows as it falls below its IPO price.

The bears are winning the war on Snap, Inc. (SNAP 4.99%) these days. Snapchat's parent company saw its shares plummet 10.9% after a pair of analyst downgrades helped send Snap stock below its early March IPO price of $17 for the first time. 

The first Wall Street pro to talk down the stock last week was Brian Nowak at Morgan Stanley, downgrading the shares from "overweight" to "equal weight" on concerns that Facebook's (META 7.89%) Instagram is gaining at Snapchat's success. John Blackledge at Cowen then downgraded Snap on Friday, lowering his price target and ad revenue estimates in the process.

Snap's a broken IPO now, and it's not easy to bounce back as a rookie once the market loses faith.

A smartphone with Snapchat app running.

Image source: Snap, Inc.

Snap crackles, pops

A pair of downgrades just three days apart will weigh on a stock, but this stings even more because of the names behind the bearish turns. Morgan Stanley was Snap's lead underwriter, distributing more than 60 million shares -- nearly a third of the total offering -- to its clients. Cowen was one of the more than two dozen firms involved in the IPO. These were the brokerage firms that were supposed to support the stock as it approached the $17 price they handed it off at four months ago -- but now they're changing their tune. 

Nowak isn't the first concerned broker to point to the success at Facebook's Instagram as a pressure point, and he won't be the last. Blackledge, who lowered his rating from "outperform" to "market perform," is slashing his price target from $21 to the exact $17 IPO price.

Blackledge is concerned about Snapchat's monetization, lowering his revenue forecasts for 2017 and beyond on decelerating ad growth. Snap's hoping that new platforms including Direct Response and Self Serve will help create more ways to cash in on its still growing traffic, but Blackledge believes the new offerings won't move the needle anytime soon.  

However, the news wasn't all bad for Snap last week. Scott Devitt at Stifel, in upgrading the stock from "hold" to "buy" on Thursday, thinks the recent sell-off presents a buying opportunity.

The problem is that Snap won't get another chance to win investors over until next month's second-quarter release. Momentum isn't in its corner right now. The stock has closed lower in nine of the past 10 trading days, and the shares have moved higher in just one of the past seven weeks.

Snap had a rough first quarterly report as a public company three months ago, but pessimism and concerns about deepening weakness following a lock-up expiration on a chunk of shares later this month are overblown. Still, if underwriters aren't willing to support Snap at its IPO price, it may be hard for retail investors to step up.  

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
SNAP
$10.31 (4.99%) $0.49
Meta Platforms Stock Quote
Meta Platforms
META
$118.10 (7.89%) $8.64

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