Opinion: Analysts Should Stop Comparing Snap IPO To Facebook, Stay Short Into Lock-Up Expiration

Written by Staff

On May 11, Moguldom provided 9 Reasons To Bet Against Snap Inc’s Stock. Back then the stock was trading at $18 at the time of our call to consider buying puts. The stock is now trading at $14.48, down around 24 percent.

Recently, analyst  Brian White, Drexel Hamilton’s global head of technology hardware and software told CNBC:

“I think it’s a great buying opportunity. If you look at a lot of high-growth companies, in the first three years after an IPO, they trade at nine-to-22 times enterprise value to revenue.”

 

White went on to suggest that Snap — the mobile app that lets users send and receive photos and videos that disappear — is likely to follow Facebook’s post-IPO dip and rise. Facebook dipped 60 percent after IPO and Snap is now down 48 percent, White noted.

This frame of reference is curious as Snap doesn’t show any material similarities to Facebook other than being an advertising-supported social media platform.

White forgot to mention that Snap is barely growing U.S. users and the end of the lock-up period is coming this week on July 29. An IPO lock-up period prevents insiders who are holding stock, before it goes public, from selling the stock for a period of 90 to 180 days after the company goes public.

Historical data doesn’t suggest it’s a good time to catch the falling knife when stocks are plummeting and there is a major lock-up expiration for executives and institutional insiders, giving them an opportunity to flood the market with stock.

S3 provided a guide for tracking how many shares will be freed up from the post-IPO lock-up constraints over the next few weeks, Business Insider reported:

White also forgot to mention how Facebook is crushing Snap by copying it with Instagram Stories, a feature that lets users post photos and videos that vanish after 24 hours. Facebook’s Instagram Stories now has more users than Snap.

Digiday, the bible for digital media publications, recently suggested publishers are switching affections from Snapchat to Instagram:

“The death knell for Snapchat was Instagram Stories,” said David Pierpont, vice president of performance media for Ansira, a digital ad agency with more than 100 clients, referring to Facebook’s video-sharing feature which launched in August 2016.

“When we saw that, we said, ‘It’s over,'” Pierpont told CNBC in a phone interview

Rather than try to catch the bottom on Snap, investors would be wise to either sell Snap stock, short the stock, or stay on the sidelines and do nothing. The biggest risk we see to shorting Snap is that a buyer shows up and catches the falling knife. Outside of an acquisition, it is a strong probability Snap could fall another 30-to-50 percent before bottoming.

Wall Street bankers have done the hard work of hyping the shiny-new-thing IPO to investors who are largely ignorant about the media and advertising industries. Investors who were locked into the hype with restrictions are now ready to sell and sell hard.

Morgan Stanley has already started backing away from their IPO hype, reducing their Snap rating, Fortune reported:

According to the note, Morgan Stanley analysts led by Brian Nowak are now less convinced of Snap’s ability to grow. In fact, the analysts effectively refuted the main reasons why Snap’s biggest champions believed in the company at all: its apparent scalability and unique platform.

“We have been wrong about Snap’s ability to innovate and improve its ad product this year (improving scalability, targeting, measurability, etc.) and user monetization,” Nowak wrote. “Snap’s ad product is not evolving/improving as quickly as we expected and Instagram competition is increasing…

“We believe Instagram has become more aggressive in competing for Snap’s ad dollars,” Nowak wrote.

 
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