Every day, Wall Street analysts upgrade some stocks, downgrade others, and “initiate coverage” on a few more. But do these analysts even know what they’re talking about? Today, we’re taking one high-profile Wall Street pick and putting it under the microscope…
Pity the folks who got in early on the Snap, Inc. (NYSE: SNAP) IPO. After going public at $17 a share, the Snapchat parent’s stock surged past $27 — but it’s been all downhill since . Yesterday, Snap stock closed at $13.57, roughly 50% below its IPO day price.
And yet, hope springs eternal for a Snapchat rebound. This morning, StreetInsider.com (requires subscription) reported that analysts at Barclays think Snap stock could rise as high as $18 over the next 12 months, surpassing the stock’s IPO price and surging ahead on the back of multiple catalysts.
What are the chances Barclays is right about that? Here are three things you need to know.
Image source: Snap, Inc.
1. Where Snapchat is at today
Some have described Snap’s third-quarter earnings report as a ” train wreck ,” but this was mostly because of missed expectations. On the surface, Snap’s numbers don’t actually look all that bad (or at least, not all of them look bad).
Daily active users of the company’s image-messaging app Snapchat grew only 16% year over year, but revenue grew 62%. While the Snapchat fan base may not be growing like wildfire, Snap’s doing a decent job of making more money off the users it already has.
On the other hand, Snap failed to earn any actual profit off of these users. Instead, Snap lost $443 million in Q3, which was a loss more than three times as large as last year’s, according to S&P Global Market Intelligence .
And, of course, growth at Snap continues to decelerate. While sales were up 62% in Q3, this was far below Q2’s growth rate of 153%, and even farther below Q1’s growth rate of 284%.
Despite all these numbers that describe how poorly Snap is doing today, Barclays sees hope that new revenue from the sale of “promoted stories” could revive Snapchat’s business. And as Snap’s new ad-bidding system matures, the company “may start achieving or exceeding consensus revenue estimates and accelerate growth in 2018” and this could spark a “short squeeze” among investors, shooting Snap stock higher.
Time will tell if Snap can fulfill Barclays’ long-term hopes for it. In the meantime, the analyst posits two other factors that could help to save Snap stock.
2. A swing in sentiment
Right now, the big story with Snapchat is how Facebook (NASDAQ: FB) has stolen its thunder, and Facebook’s WhatsApp and Instagram are both ” doing Snapchat better than Snap itself. ” But Barclays sees this argument as myopic. Citing the example of how Priceline came to dominate internet-based travel reservations, and beat incumbent websites like Expedia , Barclays points out that Expedia is actually still around today. Even if Priceline has better market share, there are still some people who use Expedia — and the same could be true about Facebook and Snapchat.
As my fellow fool Rich Duprey recently pointed out, even if Instagram and WhatsApp are more popular than Snapchat generally, 47% of “Generation Z” teenagers still see Snapchat as their preferred social media app. If Snapchat remains the favorite of this (growing) segment of the population, there’s every reason to believe that Snap and Facebook can coexist in the future.
3. A white knight from Asia
At the same time, Barclays points to Tencent ‘s multiple rounds of investment in Snap as something that could save the stock. It already owns 12% of Snap shares, after all, and the company may buy more.
If Tencent continues buying, Barclays believes that this could establish a “floor” under Snap’s stock price, with the Chinese company scooping up Snap shares (and driving up their price) any time it sees them getting cheap enough. This, says Barclays, could potentially prevent Snap stock from falling below $14 per share.
The upshot for investors
Granted, at the time Barclays wrote all of this, Snap stock was selling for below $14 a share (the banker’s upgrade has lifted the stock back up above $14 today), which tends to throw cold water on that part of Barclays’ buy thesis.
Also, just because Barclays says Snap stock could rebound doesn’t negate the warning flags we see in Snap’s financials. In addition to the slowing sales momentum, I note that over the past six months, Snap has already burned through more than $900 million of the cash it raised from its IPO. With $2.3 billion in the bank, and a cash burn rate of more than $800 million per annum (not counting cash acquisitions), I calculate that at its current rate, Snap will be out of cash again in less than three years.
That gives Snap a limited window of opportunity to prove that it can survive as a public company — and prove Barclays right.
10 stocks we like better than Snap Inc.
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Snap Inc. wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of December 4, 2017
Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook, PCLN, and TCEHY. The Motley Fool recommends EXPE. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.