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Why Snap Shares Soared Today

By Evan Niu, CFA - Dec 5, 2017 at 3:55PM

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The Snapchat operator got an upgrade from Barclays.

What happened

Snap (SNAP 0.30%) stock soared today, up by 10% as of 3:15 p.m. EST, after Barclays upgraded shares from equal weight to overweight, the equivalent of a buy. The firm believes that the worst is in the rearview mirror, and Snap is preparing to rebound.

So what

Barclays analyst Ross Sandler boosted his rating while increasing his price target from $11 to $18, which represents meaningful upside from where Snap is now trading at. Sandler has been neutral on Snap since the company went public in March (Barclays was also an underwriter of Snap's IPO), but thinks things will turn around in 2018 due to several factors.

Snapchat logo

Image source: Snap.

First off, Sandler believes that Snap will start hitting and potentially beating consensus estimates for revenue as growth accelerates in 2018. Next, the prevailing theme that Facebook is crushing Snap could be replaced by investor acceptance that both companies can peacefully co-exist. Also, short interest remains high, which could potentially pave the way for a short squeeze triggered by positive catalysts. Additionally, Chinese tech giant Tencent's recent investment (made through open market purchases) could put a bottom on the share price around $14. Finally, Snap's top line could have some incremental upside as it creates new ad units like Promoted Stories.

Now what

Investor sentiment is extremely negative on Snap right now, with short interest currently about 18% of float. Third-quarter results were terrible, and many analysts have indeed been downwardly revising their estimates, which should make it easier to meet or beat expectations. That's despite the fact that Snap does not provide financial guidance as a baseline for analysts.

Snap definitely has the potential to rebound if it can improve its execution, which could potentially lead to shorts covering their positions and creating a short squeeze. However, the company recently unveiled its app redesign, and it's too early to say what the effect on user growth or engagement will be.

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