Shares in Snap rose almost 5 per cent on Monday in New York as the owner of Snapchat received five ‘buy’ ratings from analysts including the lead underwriter Morgan Stanley.
Snap closed up at $23.83, just shy of its first day price, after a rocky ride since its initial public offering at the start of the month. The company, known for its disappearing photo messages app, priced its IPO at $17 a share.
Many of the initial analyst notes published shortly after the IPO had recommended selling the stock because of concerns the lossmaking company was overpriced and faced fierce competition, with price targets as low as $10. Snap’s lowest close so far was at $19.51 on March 17.
Morgan Stanley, which led the $20bn IPO, issued an ‘overweight’ rating and a $28 price target, saying it was “bullish” on its young, engaged audience and its ability to increase the number of advertisements it sells to target them.
Brian Womack, an analyst at Morgan Stanley, said Snap will probably not make an adjusted profit until 2020, but then will be able to scale to healthy margins by 2025.
Investors are closely watching Snap’s early performance on the public markets as it is the first of a number of highly valued private tech start-ups, known as ‘unicorns’, to list. Many hope a strong performance will tempt more other private and fast-growing companies, including Uber and Airbnb, into the public markets. One concern is that a poor performance by Snap shares may delay other start-ups from selling their shares via an IPO.
Other analysts were positive about the company’s low capital expenditure costs, because it relies on buying cloud space from Amazon and Google rather than running its own data centres. The company is also seen being able to innovate its product and keep consumers entertained. Many believe the expanding mobile advertising market, which Jefferies, the investment bank, forecasts will be as large as TV ad budgets today by 2020, provides Snap with an opportunity for expansion.
Analysts at Citigroup, which was one of the bookrunners for the IPO, said Snap’s revenues were not reliant on a significant increase in its current daily userbase of 160m, compared with Facebook’s 1.2bn users logging on each day and Instagram’s 400m.
“While user growth and audience scale may remain modest compared with Facebook, the low rate of monetisation currently and the high rate of engagement and penetration of Snapchat’s product within its core 13-24 age demo[graphic] should enable significant revenue growth and margin leverage,” they wrote.
But Jonathan Kees, an analyst at Summit Redstone Partners, issued a ‘sell’ rating for Snap on Monday, arguing it may unnecessarily burn cash for the foreseeable future while also worrying that it will not be able to compete with much larger rival Facebook.
“Our main concern centres on Facebook. They have been exceptionally aggressive in copying and promoting Snap functionality and have started to weigh down Snap’s user growth,” he said.
Get alerts on Snap Inc when a new story is published