After a euphoric public market debut, Snap Inc. shares dropped for the first time in three days after analysts began weighing in with their thoughts on the company’s true valuation.
The parent company of disappearing-photo app maker Snapchat priced shares in its initial public offering last Wednesday and they surged 44 percent on the first day of trading. On Friday the stock climbed a further 11 percent. By Monday, five of the seven analysts who cover the company had a sell rating on it while two said hold.
No analyst recommends buying the stock, according to data compiled by Bloomberg. Not all analysts are able to give their opinion on the stock yet, since those who work at banks involved in the IPO are prevented from doing so for a while.
Snap fell as much as 9 percent, to $24.61 and was trading at $25.41 at 11:47 a.m. in New York. That values the company at about $29 billion.
“Academic literature suggests that the more glamorous a company’s IPO, the more likely it is to be overpriced at its IPO date and to suffer meaningful downwards earnings and valuation revisions in the first eight quarters after it goes public,” wrote Laura Martin, an analyst at Needham & Co., in a note to investors. She said Snap’s value is more like $19 to $23 a share.
Snap, which began as a phone app for sending vanishing photos, has been building out its advertising and media business, reminding investors of the early days of social media companies. But the company is still years away from profitability, with a net loss higher than its revenue. User growth on the app slowed in the fourth quarter, leading to skepticism about how big the company’s advertising business could be.
“We think they are going to be able to monetize and they’ve shown it but we don’t think it’s going to be as effective as the valuation is implying,” said Ali Mogharabi, an analyst at Morningstar. With the stock trading at around 32 times this year’s sales, “based on that, it’s overvalued right now.”
He rates the stock sell with a price target of $15.