Bulletin
Investor Alert

The Ratings Game Archives | Email alerts

July 24, 2019, 4:01 p.m. EDT

Snap earnings send stock higher than IPO price for first time in more than a year

Snapchat parent company could be setting the stage for another surprise, analyst says as shares jump more than 18%

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Snap Inc. (SNAP)
  • X
    S&P 500 Index (SPX)

or Cancel Already have a watchlist? Log In

By Emily Bary


Getty Images
Snap easily exceeded user-growth expectations in the latest quarter.

Snap Inc. shares closed atop the price charged in its initial public offering for the first time in more than a year Wednesday, after analysts said a strong earnings report could set the stage for another monster quarter.

Snap /zigman2/quotes/205087158/composite SNAP -3.29%  stock, which went for $17 in its IPO but has never managed to consistently trade higher than that price, gained 18.5% Wednesday to close at $17.58, giving the company a market cap of more than $23.8 billion. It was the first time Snap has closed higher than $17 a share since March of 2018.

/zigman2/quotes/205087158/composite SNAP 16.15, -0.55, -3.29%

The social-media company announced Tuesday afternoon that it added 13 million daily active users (DAUs) sequentially in the second quarter, 2 million more than analysts expected, and Snap’s management said to expect net additions of 2 million to 4 million users for the current period. Such a forecast seems “too low,” wrote MoffettNathanson’s Michael Nathanson, given his analysis of the Snapchat Ads Manager, which he says shows 8 million new DAUs already through July.

“Assuming that there isn’t a major DAU drop-off over the back-end of this quarter, the company appears to be setting up another upside surprise on DAUs in 90 days,” Nathanson wrote.

Don’t miss: First Data deal has turned Fiserv into a big short play

Nathanson got to take a small victory lap after the report—his 15-million DAU projection for the second quarter was far closer to the real number than the consensus view—though he’s not quite ready to jump on the bull train yet. He maintained a neutral rating upped his target to $11 from $10.

Snap’s lofty valuation is a key concern, as Nathanson says that Snap’s likely multiple of 11 times forward revenue represents “one of the richest valuations we have ever seen.” Nathanson also worries that Snap’s buzz-worthy new augmented reality lenses, which helped draw in users recently, could be just a fad. He sees an “underappreciated” threat from TikTok, a popular short-form video app that’s caught on with younger users.

Read: Visa CFO cheers growth in emerging markets and new payment types as company tops expectations

Others were slightly more upbeat, including Stifel’s Scott Devitt, who titled his note to clients: “A Newly Augmented Reality.” Devitt pointed to traction on the advertising front, as Snap’s CPMs— cost per thousand or the key ad-pricing metric—fell only 3% on a sequential basis, which he said is encouraging for Snap’s revenue-growth potential in the back end of the year.

“While Snap plans to continue investing to support its long-term strategic objectives, the company demonstrated meaningful operating leverage during 2Q, highlighting the incremental margin potential of its business model,” he wrote, while sticking with his buy rating and hiking his price target to $19 from $17.

See also: Tech shares fall as U.S. finally admits it is investigating Big Tech for antitrust

In raising his price target to $19 from $14, Barclay Capital’s Ross Sandler said Snap’s message is “resonating with the mobile advertising community.” Sandler maintains an overweight rating.

UBS analyst Eric Sheridan was downright ebullient: He upgraded Snap shares to neutral from sell and doubled his price target to $16. “At this point, we must acknowledge the turnaround in underlying operating trends,” Sheridan said in a note late Tuesday. He predicts a spike in DAUs (to more than 250 million in fiscal 2022) and revenue ($2 billion to $3 billion in the next three years), with Snap turning a profit by fiscal 2021.

Conversely, Needham’s Laura Martin stayed bearish following the report, writing that while user and engagement numbers were strong, the company still isn’t in a strong financial position. “We believe that Snap must raise capital over the next 12 months, which we believe creates an overhang for its share price,” she wrote.

Read: Facebook earnings seem immune to the Big Tech backlash — for now

Martin also said that despite Snap’s user-growth momentum, the company is still struggling to reach older users. “As Snap adds content that attracts older users, that same content drives defections of younger users,” she wrote. “By implication, Snap must invest in its targeting abilities so it can send content to older users that are largely different from younger users, or risk churn rising.”

She rates the stock at underperform.

Snap shares have soared 169% so far this year, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -3.35%  has risen 20%.

/zigman2/quotes/205087158/composite
US : U.S.: NYSE
$ 16.15
-0.55 -3.29%
Volume: 23.15M
Feb. 24, 2020 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$23.72 billion
Rev. per Employee
$409,309
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,225.89
-111.86 -3.35%
Volume: 2.75B
Feb. 24, 2020 5:04p
loading...

Emily Bary is a MarketWatch reporter based in New York.

Get news alerts on Snap Inc. — or create your own.
This Story has 0 Comments
Be the first to comment
More News In
Industries

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.