Washington - Snap, the parent company of the popular
social-media app Snapchat, had a blissfully smooth IPO process that exceeded
expectations.
But it turns out some of the company's new investors may
be as fleeting as the messages that users share on the app.
Less than a week after the company celebrated its first
day of trading on the New York Stock Exchange, the stock is down sharply. After
falling as much as 12 percent during the day, Snap shares closed down by about
10 percent Tuesday. At $21 a share, the company marked two straight days of
losses and landed below the $24 it closed at on its first day of trading. The
losses may be a sign that some investors are having doubts about the company's
long-term potential, stock analysts say.
"A stock like this is going to be incredibly
volatile because there's so little information about the company's track record
and it's difficult to extrapolate to the future," says Brian Wieser, a
senior analyst at Pivotal Research Group.
Snapchat, which was launched in 2011 by Stanford
University students, set itself apart from other social apps by specializing in
ephemeral messaging. The messages or "snaps" that users send
disappear within minutes or hours and are animated by splashy filters that give
users doe eyes, bunny ears and funny voices. The company also has partnerships
with media companies, including The Washington Post, who use the platform to
share videos and articles.
Many analysts from top investment research firms such as
Pivotal, Morningstar and asset management firm Needham have labelled the
company as overvalued since it debuted Thursday, citing a short track record, a
slowdown in user growth and fierce competition from other social-media
companies. Morningstar analyst Ali Mogharabi said the company would be fairly
priced at $15 a share. Wieser, who is even more bearish, set the target price
at $10 a share.
When Snap filed for the IPO last month, the company said
that its losses were growing: it posted a net loss of $372.8 million in 2015
and a net loss of $514.6 million in 2016. It also warned that it "may
never achieve or maintain profitability," a cautionary note that has also
been offered by some other tech companies, including Twitter and Etsy.
Another major challenge for Snap, which earns most of its
revenue from selling advertisements, is that it may face an uphill battle
competing against other giants in the space, such as Facebook, analysts say. In
a report published before the company's IPO, Morningstar's Mogharabi wrote that
Snap's competition is "overwhelming." Laura Martin, an analyst for
Needham & Company, warned in a note to clients this week that other
companies are stealing Snap's best ideas.
Read also: Snapchat: how it works
There are also concerns about the company's user growth.
In a regulatory filing, the company touted a user base of 158 million people
who send 2.5 billion messages every day. Some analysts question whether Snap
can continue to gain customers or grow revenue amid steep competition from
other social-media companies. The company has already experienced a slowdown in
user growth, citing "technical issues" as part of the reason.
Because of these factors, analysts say the company is
pretty young and still needs to prove that it can be profitable in the long
run.
No measure
Still, the stock's early performance may not be an
adequate measure for how it will do in the long run. Facebook, for example,
also sold off shortly after its IPO and saw its stock price fall by more than
40 percent in the four months after it hit the market in May 2012. But it was
able to recover and at $137 a share, is now up 360 percent from its $38 IPO
price, a rise analysts credit to its large global user base and success with
mobile advertising.
Twitter, in contrast, peaked at $69 a share about two
months after it debuted with an IPO price of $26. But today, amid disappointing
revenue and slow customer growth, Twitter trades at $15 a share.
"It's tough to tell," Mogharabi says, adding
that Snap will have to continue to offer innovative features if it wants to
stay in business. "The valuation of the stock certainly represents a lot
hopefulness."