Wall Street analysts are warning people not to buy Snapchat

Nathan McAlone

Mon, Mar 6, 2017, 9:21 AM

(Snapchat CEO Evan Spiegel.Getty/Michael Kovac)

Snap is still flying above its initial public offering price, even though the Snapchat maker doesn't have a single "buy" rating from Wall Street analysts.

After Snap's IPO on Thursday, the stock jumped 44% in a day and has continued to climb, moving up another 4% on Monday morning. (Update: Snap moved down 7% later in the morning.)

But that doesn't mean Wall Street analysts are loving it.

On Monday morning, Bespoke Investing Group noted that Snap is the only "US stock with a $20+ [billion] mkt cap that has ZERO buy recommendations."

CNBC put together a short list of analysts that have weighed in so far, and it includes five sells and two holds:

Needham: underperform (sell)
Atlantic Equities: underweight (sell)
Morningstar: sell
Aegis: hold
Susquehanna: hold
Nomura Instinet: reduce (sell)
Pivotal Research: sell

Although Snap doesn't have any "buy" ratings yet, it's currently being covered by a relatively limited set of analysts. Some of the big Wall Street research firms also served as underwriters on the Snap IPO, which means they have to wait several weeks before they can publicly talk about Snap.

But still, why is everyone so wary?

Anthony DiClemente at Nomura Instinet has a good summary of the reasons to be skeptical.

"Snap Inc. is becoming a public company just as its user growth and monetization growth rates are beginning to meaningfully slow," he wrote.

He wrote that upside in shares is limited by these four things:

"Already slowing growth in daily active users (DAUs)."
"Slowing monetization (ARPU) growth."
"Fierce competition from larger rivals such as Facebook, Instagram, and WhatsApp."
"Rich valuation relative to current and future growth."

In other words, buyer beware.

So how is Snap telling its investors it can make money eventually? Indications are that Snap doesn't expect to gain the gargantuan scale of Facebook, but rather create a premium product to wring out more money per user.

One big way Snap thinks it can do this is by grabbing TV ad budgets, a goal shared by digital giants like YouTube and Facebook. This money has been slow to move from TV to digital video, but Snap thinks it's in the best position when that accelerates. That's because Snap considers ads on Snapchat superior to those on television and way better than those on other digital-video competitors, according to Snap's S-1 filing.