So when it went public, who snapped up Snap stock?
Ryan Eshaghi, an 18-year-old freshman at the University of California, Irvine, said he became "addicted" to the app when he was in eighth grade. "It defined the way teens and young adults communicate with one another," he says.
Eshaghi says he bought his 20 shares for the long term, financed by his part-time job helping high school students with college applications. "I see the company growing a lot," he says.
"There’s a lot of upside in Snapchat going forward and I wanted to partake in its IPO,” said Will Jamieson, 23, who works in marketing in Charleston, South Carolina. He also owns Tesla shares.
After two days of euphoria, however, these early Snap investors are learning that age-old stock market rule: What goes up can come down.
After gaining 59% in its first two days as a public stock, Snap (SNAP) shares dove on Monday as several brokers came out with sell recommendations. They closed at $23.77, down 12% for the day and 19% off the high. The drop meant that anyone who didn't buy at the pre-trading IPO price of $17 was probably sitting on a loss.
Scott Kessler, an analyst with CFRA Research, says he was “surprised” to see it fall so quickly, but notes that can be common with new, hot stocks.
When people see a lot of hoopla over a new IPO, and “they don’t want to miss out,” that in turn causes a “lot of volatility,” which will continue, notes Kessler.
Millennials have largely stayed out of the stock market, held back by student loans, recent memories of the last crash and financial crisis, and a shortage of funds. Brokers and advisers had wondered, given Snapchat's popularity, if this IPO could entice them in.
The early answer: yes.
Online stock trading app Robinhood, whose core demographic has an average age of 30, says that Thursday was its biggest day ever, and that 43% of all its traders that day went for Snap stock.
“Snap’s IPO revitalized investing among the younger generation,” notes Baiju Bhatt, the co-founder of Robinhood. “We also saw a surge in new accounts, with many new customers opening up their first brokerage account."
The median age of Robinhood investors buying Snap on Robinhood has been 26, the same age as Snap CEO Evan Spiegel.
Chris Stearns, 30, who lives near Virginia Beach, bought 13 shares Friday morning because he sees Snap as the next Facebook.
“Snap is the first IPO-centric stock I’ve taken,” he says. “It’s a huge growth opportunity."
Stearns, who works with his dad putting in glass in homes and businesses, says that every person he’s hired over the past few years in their 20s was always on Snapchat.
“They use it constantly,” and their usage struck a chord with him.
Spencer Wilson, who lives outside of Flint, Mich. just turned 17, and he, too, bought 20 shares of Snap.
"Every single one of my friends uses it," he says. "I think it will be really successful."
That brand loyalty drove Snap's younger investors to the stock, overriding concerns by many financial advisers that the unprofitable company, whose user growth started to slow at the end of last year, was more likely to follow Twitter's stock market travails than Facebook's success.
Zac Vineyard, 33, a web developer near Boise, Idaho, works for a local university, and being around the younger students convinced him about the power of Snapchat.
“It’s the only way I see people younger than me communicate,” he says. “Snapchat has clearly captured this audience in an engrossing way.”
A rebound in the stock could indeed entice more into the market, which is poised for more IPOs after a long hiatus.
Tim Edwards, 35, who lives near Chicago, bought 35 shares of Snap and is already looking ahead to the next big tech IPO, hoping to see ride-hailing apps Uber and Lyft and hotel alternative Airbnb in 2017.
And if not?
On Twitter, users described the scenario in fittingly visual terms: a roller coaster plunge.
|University of California Irvine freshman Ryan Eshaghi, 18, invested in the Snap, Inc. IPO because he's a fan of the Snapchat app. (Photo: Ryan Eshaghi for USA TODAY)|
Snap stock suffers first major selloff since going public
The tide continues to shift on shares of Snap Inc. days after its splashy initial public offering.
Shares of Snap Inc. SNAP, +0.34% fell more than 12% on Monday, reversing two straight sessions of upswings since its market debut. The selloff followed two more bearish initiations on Wall Street, adding to several others that have emerged in the past few days claiming the stock is overvalued.
Needham analyst Laura Martin initiated coverage on the stock with an underperform rating, which is the equivalent of sell, and a fair value price target range of $19 to $23 a share. She expressed concern that Snap stock could suffer through at least 2019, plagued by decelerating user growth and huge losses that could weigh on its fair value even if sales increase.
“The sexier and more glamorous a company’s IPO, the more likely it is to be overpriced at its IPO date and to suffer meaningful downwards earnings and valuation revisions in the first 8 quarters after it goes public,” said Martin, citing “academic literature.”
CFRA Research analyst Scott Kessler initiated coverage with a sell rating and $22 target.
A number of analysts in recent days have expressed concern that Snap stock is overvalued, particularly when it was trading well above its IPO price in the high-$20s range. The average rating on the stock among a poll of six analysts surveyed by FactSet is the equivalent to sell, while the average price target is $16.50, below Snap’s IPO price.
Snap stock closed at $27.09 on Friday after pricing in its market debut at $17 the day earlier. It ended at $23.77 on Monday.
In a note to clients that went out Monday morning, Needham’s Martin referred to Snap as a “lottery-like stock,” which at first glance may look like a good buy. However, closer scrutiny of its fundamentals reveal a different story plagued with risks, she said.
Among those risks is slowing user growth, which is exacerbated by the fact that Snapchat has a total addressable market that is 80% smaller than Facebook Inc.’s FB, +0.18% according to Needham’s calculations.
Facebook, which recently rolled out a Snapchat-like ephemeral photo-sharing service called Instagram Stories, offered to buy Snapchat in 2013 for $3 billion. Its rival Snapchat service, launched this past summer, has been credited for a deceleration in Snapchat’s user base.
“We see strong user engagement, but user growth that has decelerated,” said Kessler, who cited similar reasons for his sell rating. Revenue gains may be outpacing peers right now, but it faces much larger rivals, which becomes an issue as it tries to scale beyond a niche product, he said.
Snapchat’s revenue growth might also be an issue. The company reported revenue of $463.1 million last year, up sharply from just $58.6 million in 2015 as it continued to increase its ad load. However, Needham’s 2017 revenue target of $3.3 billion for 2019 would require the company to have a 14% to 16% share of adjusted mobile or digital ad spending, while it had just a 2% share in 2016.
Even if Snap does grow revenue by eightfold to meet that target, its share price could still decline when taking into account the enterprise value/sales ratios of digital-advertising leaders Facebook and Alphabet Inc. GOOGL, -0.21% GOOG, -0.16% said Martin.
Needham also believes there’s “no clear path to profitability before 2020.” Last year, Snap reported a loss of $514.6 million, compared with $372.9 million in 2015, which stemmed from higher costs of revenue.
Snapchat, which has been referring to itself as a camera company in an effort to distance itself from its social media peers, was joined in Monday’s sea of red by GoPro Inc. GPRO, -7.92% . Shares of GoPro, a camera company that often refers to itself as a media company, closed down 7.9% to $8.14 following a downgrade from Goldman Sachs.
Snapchat Will Be a Stock Market Dog
Snapchat lured a herd of IPO starved investors, sending the stock soaring. But that upward trajectory may disappear quickly.
At least that's the growing opinion of influential group of Wall Street stock pickers. The average prediction of the analysts who have issue a recommendation on Snap Inc. is that the shares of the photo sharing company could plunge 40% in the next year. That means these Wall Streeters believe the shares, which closed at just under $24 on Wednesday, could go as low as just below $18 in the next year.
So far, seven analysts have issued a rating on the stock, none of which work at firms that helped sell the Snapchat's IPO. Five say the stock is a "Sell," while another two are calling the stock a "Hold." Not a single analyst has yet to recommend the stock. And that growing skepticism could be what drove shares of Snapchat down as much as 12% in trading Monday.
The negative outlook for Snap's shares is notable not just because it's a hot IPO, but also because Wall Street analysts are usually a pretty optimistic bunch, says Narasimhan Jegadeesh, who teaches finance at Emory University's Goizueta Business School.
In their reports, the analysts rehashed some of the concerns that were voiced prior to Snap's soaring debut: The company's user growth has slowed and it lacks profits. But there was also talk of stiff competition.
"Ultimately, Snap's competition, which includes wide-moat Facebook with nearly 2 billion users, is overwhelming, in our view. In particular, Facebook's Instagram may emerge as a substitute for Snapchat," Morningstar wrote in their Friday note.
But people who bought shares in Snap, like this Uber driver, don't need to fret quite yet.
The company has quite a few cheerleaders on the sidelines. Snap had 26 underwriters on its IPO, several of which are titans in world of Wall Street research. That includes Morgan Stanley, Goldman Sachs, J.P. Morgan, Deutsche Bank, Barclays, and Credit Suisse.
Currently, those 26 underwriters have been barred by Securities and Exchange Commission regulation from releasing research for 25 days after the IPO.
" So after the quiet period, they will be releasing their own research in a few weeks," says Matt Kennedy over at Renaissance Capital. "Those are all typically going to be [buy] or hold. . .but it's really likely [buy]."
Moreover, these underwriters likely have more access to management and information than those that aren't involved in the IPO, said Leslie Pfrang of Class V Group, an IPO consultancy firm.
That could move the needle slightly in Snapchat's favor, reminding uncertain investors why they might have liked Snap in the first place—how inexpensive it is to add each new consumer, potentially creating sizable profit margins not unlike Facebook's 40%.Or maybe it was just the dog faces.