Now is Not the Time to Own Snap Stock

Snap (SNAP) shares rose 44% yesterday following the popular Snapchat maker’s initial public offering yesterday. From the eyes of Nomura analyst Anthony Diclemente, the company has gone public at a time when user growth and monetization rates are starting to “ghost” with a considerable drop-off.

In reaction, the analyst initiates coverage on SNAP with a Reduce rating and a price target of $16, which implies a potential downside of close to 35% from where the shares last closed.

For Diclemente, upside for the stock faces hurdles that boil down to the following four points: “1) already slowing growth in daily active users (DAUs); 2) slowing monetization (ARPU) growth; 3) fierce competition from larger rivals such as Facebook (FB), Instagram, and WhatsApp; and 4) rich valuation relative to current and future growth,” and therefore, the analyst asserts, “We see Snap’s revenue opportunity as constrained relative to expectations and, as such, we think shares are fairly valued at best at the IPO price.”

Between sluggish user growth rates restricting the kind of long-term revenue Snap can prospectively generate coupled with steep rivalry, with the analyst pointing specifically to last August’s launch of Instagram Stories, he continues, “As a result, higher monetization per user is likely to be the primary driver of growth, and this too is currently slowing.”

Ultimately, “Lofty valuation demands faster revenue growth despite significantly slower user additions. We believe that Snap should be valued at a modest discount to FB and TWTR multiples at the time of their IPOs in light of slowing user growth and a fierce competitive environment. As such, we do not recommend ownership of the stock,” concludes Diclemente.

As usual, we like to include the analyst’s track record when reporting on new analyst notes to give a perspective on the effect it has on stock performance. According to TipRanks, five-star analyst Anthony Diclemente is ranked #223 out of 4,513 analysts. Diclemnte has a 71% success rate and garners 11.4% in his annual returns.

TipRanks analytics demonstrate SNAP as a Sell. Based on 3 analysts polled by TipRanks in the last 3 months, 2 maintain a Hold on Snap stock while 1 issues a Sell.

Facebook Continues to Be the Best Way to Play the Social Media Game

Though Snapchat is igniting lots of buzz around the Street post-IPO, as far as Aegis analyst Victor Anthony assesses the competition, Facebook is “still the fundamentally strongest social media platform” at the end of the day. Therefore, despite Snap’s entrance as a public company, the analyst remains undeterred in his bullish attitude, reiterating a Buy rating on shares of FB with a $155 price target, which represents a 13% increase from where the stock is currently trading.

In the analyst’s initiation coverage on Snap, he was sidelined especially when taking under account Facebook’s “ease” in reproducing Snapchat’s features throughout its “ecosystem.” While platforms like Facebook and Instagram are rising in popularity among teenagers, which Anthony points out is Snap’s “core demographic,” Snap meanwhile is “losing mindshare.” The one risk to Facebook was that younger users liked Snapchat as a parent-free cool zone. Yet, Snap might not stay as hip for long, according to eMarketer, who predicts a future of user growth for Snap backed by older users, which indicates the parent-free barrier might soon be falling.

Anthony adds, “That aside, efforts to expand outside its core demographic to reach older users could prove futile if older users already on Facebook/Instagram/WhatApp/ Messenger decide to utilize those Snapchat-like features on those apps rather than shift their media time to Snapchat.”

“We point all of this out to investors who may be tempted to swap out of their Facebook positions to buy Snap’s shares. Facebook’s collection of apps has placed it in a fundamentally solid position from a competitive perspective, and they are likely to continue to ward off competitive pressures in the space. And given that Facebook is, in effect, successfully copying the popular features on Snapchat, it is investors in Snap that should be concerned about Facebook. We continue to see Facebook as the best way to continue to play the social media user time and advertising shift,” Anthony contends.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, five-star analyst Victor Anthony is ranked #171 out of 4,513 analysts. Anthony has a 63% success rate and realizes 11.8% in his annual returns. When recommending FB, Anthony yields 46.9% in average profits on the stock.

TipRanks analytics exhibit FB as a Strong Buy. Out of 36 analysts polled by TipRanks in the last 3 months, 34 are bullish on Facebook stock and 2 remain sidelined. With a return potential of 17%, the stock’s consensus target price stands at $160.66.