Snap: Analysts Are Getting Bullish, Should You Be Too?

Analysts are turning bullish on the popular social media platform operator, Snap Inc (NYSE:SNAP). After a tumultuous two years since its IPO in 2017, it seems the investor community has begun to like what Snap is doing to turn its business around.

Snap stock has climbed 154% this year and 193% from the December low, making it the best performer in the NASDAQ Internet Index. The shares closed Friday up 1.5% at $14.52.

Snap price chart

The operator of photo-sharing app Snapchat is gaining traction after a disastrous 2018 when the number of users shrank, several top executives left and teenagers didn’t like the redesign of its app.

However, according to Nomura Instinet, one of the most bullish research houses on Snap stock, new users on this social-messaging app could now double the company’s own forecast.

Downloads for Snapchat continued to show strong growth in August, rising 21% from a year ago, according to a monthly data tracker by Nomura. At this rate, analyst Mark Kelley estimated in a recent note, Snap will add between 5.5 and 10 million users this quarter, well above the range of 2-4 million projected by the company.

Earlier, Stifel upgraded Snap to buy from hold and hiked its price target to $17 from $13, with its analyst John Egbert saying that he is increasingly optimistic about Snap’s growth prospects in the second-half of 2019 and beyond.

Morgan Stanley, in a note last week, upgraded Snap to “equal weight,” from “underweight,” citing faster ad revenue growth and improved discipline in managing operating expenses. Said MS:

“At a high level, year-to-date we have underestimated Snap’s stronger top and bottom-line execution and ability to drive growth and upward revisions."

Snap’s games platform and new augmented reality features which enables users to add graphics to their hands, feet or bodies are among the features that have been very popular in recent months, in addition to the app’s face-distorting lenses, and a gender-swap lens that turns a male face into a female one, and vice versa.

Instagram Threat

Snap’s improving financial and user metrics have no doubt played a big role in its stock’s outperformance this year, but the regulatory oversight that the large social media companies are facing is another big positive for the company.

An app with a clear and defined audience and with little room for misuse is in a much better position to withstand potential regulatory changes globally than behemoths like Facebook Inc (NASDAQ:FB) and Alphabet’s Google (NASDAQ:GOOGL) — the social media heavyweights coming under increasingly intense scrutiny.

But despite shifting expectations from analysts, Facebook-owned Instagram continues to pose a great competitive threat to Snap and its future growth. The shares plunged 7.6% on Oct. 3 after Instagram rolled out a new mobile application called “Threads,” that will allow users to stay in close contact with a small circle of people.

That’s very similar to the domain which Snap is trying to monetize after creating close communities among friends. In 2016, Instagram copied Snapchat’s popular “stories” product for posting photo and video updates that disappear.

And despite this year's strong comeback, investors shouldn’t forget that Snap stock still trades more than 40% down from the level it touched soon after its IPO in 2017. Those who bet on Snap stock at the time are just recovering their losses, besides having missed out on other money-making opportunities.

Bottom Line

Snap, in our view, remains a highly volatile stock and isn't suitable for long-term investors because of its uneven user-engagement record, escalating costs, and a higher turnover among its top executives. Instagram, owned by much bigger rival Facebook, continues to pose an existential threat to Snap that's unlikely to go away. Due to these uncertainties, we don’t recommend risk-averse investors buy this stock.