Embattled social media company Snap Inc (NYSE:SNAP), parent of popular messaging app Snapchat, might be down but it is not out. SNAP stock closed Monday at $14.08, down 17% from its March initial public offering (IPO) price of $17. The stock, which soared 44% to high of $29.44 on its first trading day as a public company, has snapped back to reality.
And while the $2 billion loss the company suffered in the first-quarter remains fresh on investors’ minds, one prominent Wall Street analyst nonetheless believes SNAP stock can still reach $30 per share, suggesting an almost 100% premium from current levels.
Calling that price target “optimistic” would be an understatement, especially considering the Street’s median 12-month price target is $21 would still yield almost 40%.
Too Much SNAP Stock Judgement?
In a research note to investors Monday, Brian White, analyst at Drexel Hamilton, argued that the market was focusing too much on the upcoming lockup expiration, where early investors such as venture capitalists were permitted to sell their shares.
While reiterating his Buy rating and $30 price target, White wrote, “Sentiment around Snap remains at ghastly levels and we believe [there’s] a buying opportunity for investors that can look out twelve months.”
Despite increased competition from Facebook Inc (NASDAQ:FB), White noted that the competitive environment “has not stopped the company from innovating and maintaining the authenticity that millennials have come to appreciate from Snapchat.” Adding, “Despite a never ending news flow of gloom and doom circling Snap, the company continues to forge ahead with new innovations, original shows and partnerships.”
To White’s point, the market could be overreacting to some upcoming events. But the selling pressure has been the result of SNAP’s own weakening fundamental metrics. And when combined with the fact that the company is not projected to be profitable this decade, it begs the question whether its market cap of around $18 billion makes sense today.
Elsewhere, the company’s 166 million daily active users (DAU), which missed Q1 forecast of 168 million, is a legitimate concern. The lack of growth is the result of Facebook and Instagram ramping up features that undermine the strength of Snapchat’s platform.
What’s more, the fact that Facebook, which just passed 2 billion users and is ten times larger than SNAP, is growing at a faster pace than SNAP is an indictment on the company’s growth strategy. It’s likely for this reason that lead underwriter Morgan Stanley analyst Brian Nowak recently downgraded SNAP stock to Equal Weight from Overweight and reduced his price target from $28 to $16.
Nowak, who also noted he has seen no evidence that SNAP has figured out how to effectively measure return on investment (ROI) for advertisers — something that Facebook has perfected and Instagram has improved upon — cited weakness in SNAP’s advertising business, which he says has been caused by delayed improvements to its ad product.
What’s Ahead for SNAP?
On the positive side, the company is working to diversify its revenue stream. CEO Evan Spiegel has discussed his visions of Snapchat to one day become a next-generation TV platform — one that can rival Netflix, Inc. (NASDAQ:NFLX). To that end, the company’s $100 million content deal with Time Warner Inc (NYSE:TWX) was a good first step. The two-year deal calls for Time Warner to deliver up to ten original shows per year from its Turner and Warner Bros units.
Terms of the deal were not disclosed and it remains to be seen to what extent Time Warner and deals that SNAP has signed with the likes of Walt Disney Co’s (NYSE:DIS) ABC and Comcast Corporation (NASDAQ:CMCSA) can help create separation from Facebook. But to the extent that original content deals help the company attract advertisers and grow its daily active users, SNAP stock could be a potential turnaround candidate.
But I’m not holding my breath. And I don’t advise investors to do so, either.
With two lockup expiration dates coming up, which may flood the market with tons of additional SNAP shares, now’s not the time to attempt to catch this falling knife, especially with the stock still trading at nearly six times 2019 revenue estimates, with no signs of profitably for three years. As such, despite the stock’s recent punishment, SNAP stock is not yet a bargain to suggest it should trade at $20, much less $30.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.