Snap shares jump after 7 top analysts say 'Buy'

Sam Ro · Contributor

Mon, Mar 27, 2017, 4:48 AM

Wall Street’s Snap (SNAP) bulls have been unleashed, and shares are surging.

At least seven top analysts have issued “Buy,” “Outperform,” or “Overweight” ratings on Snapchat’s parent. This follows what has largely been bearish calls on the company, which considers itself a camera company.

“This ain’t your parents’ camera company,” Citi’s Mark May said. May has a “Buy” rating on Snap and a $27 price target.

“We are bullish about Snap’s ability to monetize its highly engaged daily active user (DAU) base (~160mn DAUs spending an average of 25-30 mins/day),” Morgan Stanley’s Brian Nowak said on Monday. Nowak has an “Overweight” rating on SNAP and a $28 price target.

And it’s not just about young people.

“Our consumer survey suggests several key investor concerns are overblown and reinforces the idea that Snap ad units work and that it can expand into older users,” Deutsche Bank’s Lloyd Walmsley (“Buy” rating, $30 price target) said. “Competitive risks, while real, are overblown in our view.”

Snap’s highly-anticipated IPO priced at $17 per share. Shares opened for trading at $24, got as high as $29.44 and plunged to as low as $18.90.

A woman wearing Snapchat Spectacles waits for Snap Inc. to list their IPO on the NYSE, March 2, 2017. REUTERS/Brendan McDermid

On Monday, it was trading at around $24, up about 5%.

Analysts at Goldman Sachs, Credit Suisse, RBC, and Jefferies also unveiled bullish ratings on the stock on Monday, with price targets ranging from $27 to $31.

Why so bullish on SNAP?

As we noted, the bullish tone is in stark contrast to the early analyst calls that have largely been bearish.

One explanation for the universal bullishness today is conflict of interest. Morgan Stanley, Goldman Sachs, Credit Suisse, Deutsche Bank, Citi, RBC, and Jefferies were all underwriters of Snap’s IPO, which also explains why all of these calls came on the same day. As Yahoo Finance’s JP Mangalindan reported, these banks have to observe a quiet period before their analysts are allowed to initiate calls on the stock.

Considering this existing relationship, it’s not crazy to think that banks doing business with a company may want to stay in their good graces by issuing bullish calls on the stock.

Snap's already been on a wild ride. — Snap’s already been on a wild ride.

To be fair, Wall Street firms have gone to great lengths to dispel this conflict of interest. Morgan Stanley’s tech bankers are separated from Morgan Stanley’s tech analysts by huge firewalls. However, the empirical evidence suggests these conflicts persist.

Regardless of the banking conflicts, these bullish ratings were pretty easy to see coming. Indeed, it’s often in the best interest of analysts to have a bullish slant, as bearish analysts have been known to get cut off by the companies they cover.

So what are the analysts saying?

To be completely fair to the analysts, they may eventually be proven right.

“Snap is a venture stage investment in the public markets, something unseen in recent years where nearly all internet companies waited until later stages of growth and profitability to go public,” Goldman Sachs’ Heath Terry said. “While this clearly carries a higher risk profile, we believe it also comes with higher reward potential.”

Indeed, in an environment offering lackluster returns, a high-flyer like Snap might just be what investors have been looking for. Terry has a “Buy” rating and a $27 price target on the stock.

“Unlike competitors that aspire to connect the entire world, Snap is focused on high- value users located in key ad markets like the US and W. Europe (cost to service rest of world users is not justified by the rev opportunity),” Jefferies’ Brian Fitzgerald wrote. “Today, around 60% of Snap’s users come from the top-10 ad markets, which command nearly 85% of the global mobile ad spend.”

Fitzgerald has a “Buy” rating and a $30 price target on the stock. But the top bull of the day looks like RBC’s Mark Mahaney, who has an “Outperform” rating and a $31 price target.

A stuffed ghost rests on a trader's screen above the floor of the New York Stock Exchange. REUTERS/Lucas Jackson — A stuffed ghost rests on a trader’s screen above the floor of the New York Stock Exchange. REUTERS/Lucas Jackson

“Snap has become an innovation leader – for both consumers and advertisers – in arguably the single fastest advertising medium today – Mobile,” Mahaney said. “It has also emerged as one of the leading Media Platforms for Millennials. We believe that if it sustains its current level of innovation, it can sustain premium growth for a long time and scale to profitability.”

All of these analysts identify numerous risks to their calls and the company. Credit Suisse’s Stephen Ju, who as an “Outperform” rating and a $30 price target, is very blunt about the volatility investors should be willing to stomach.

“We believe SNAP shares will be one of the most volatile in our coverage given its nascent state and high valuation – we expect it to trade primarily on the growth trajectory and acceleration/deceleration (i.e., the first and second derivative) suggested by the latest reported results for Daily Active Users as well as Average Revenue per Daily Active User,” Ju said.

Despite any discussion of downside risks, it’s the analysts’ bullish ratings and price targets that will drive the conversation for now.

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Sam Ro is managing editor at Yahoo Finance.
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