Where Does Snapchat Stand from a Fundamental Perspective?

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Snapchat's parent, Snap IncSNAP has been in the limelight ever since its blockbuster IPO earlier this month. Snap was off to a spectacular start with shares up 44% on the first day of trading.

However, since then, the company hasn't been able to keep up. Snap's stock has been on a tumultuous ride since its debut on Mar 2. The stock reached an all-time high of $29.44 the very next day of its IPO, but it lost some shine and nosedived over the next couple of weeks. Snap touched an all-time low of $18.90 on Mar 17 and is currently trading at $22.23, a notch lower than where it once started.

Currently, the company has a Zacks Rank #3 (Hold) and a VGM style score of "F", which is not a favorable combination.

A VGM score (Value, Growth & Momentum) rates each stock on their combined weighted styles, helping to identify stocks with the most attractive value, best growth, and most promising momentum, across the board.

Stocks with a VGM Score of A or B and a Zacks Rank of #1 or #2, have even better returns, on average, than the individual components, as it considers three times as many items that are correlated to future stocks returns.

Snap Inc. Price

Snap Inc. Price | Snap Inc. Quote

Snapchat's Fundamentals

At the outset, most analysts initiated coverage on Snap with a either a "hold" or a "sell" rating. They argued that Snap has already started observing its average daily user growth rate slow down. The company added only 5 million active daily users in the fourth quarter of 2016, which happens to be the lowest since the third quarter of 2014. User growth holds the key in attracting advertisers, which is the primary source of revenues for Snapchat. Plus, the company is yet to make profits.

Notably, Snap has lost money since it began operations in 2011. Despite that, the company's valuation reached a massive $34 billion (84 times of 2016 revenues) on debut, making it the biggest IPO since Alibaba BABA in 2014 and much bigger than Facebook.

Snapchat's nosebleed valuation, despite being a loss making company, compelled analysts to remain wary. Though the company's revenues are on the rise, losses are ballooning. Reportedly, in 2016, Snap's revenues of $404.5 million were nearly six times higher than 2015 revenues but net loss for the year increased 38% to $514.6 million.

To add to its woes, research firm, eMarketer slashed Snap's ad revenues projection for the current year. Ad revenues are projected to be $770 million, $30 million less than the earlier estimate (Sep 2016) due to "higher-than-estimated revenue sharing with partners." Despite the slash, revenues are still expected to be up 157.8% from last year.

Also, Snapchat attracts a particular segment of demography. Analysts argue that teens are inclined to sudden changes in preferences. Media reports have quoted Snap "admitting" that increasing competition from big players with better resources, like Facebook Inc FB , is a big threat as they can easily lure users to their platform. Since Mar 2, Snap shares declined 9.19% as against 1.56% growth witnessed in Zacks Categorized Internet Software market.

Underwriters Offer Respite

On Mar 27, 2017, Snap shares surged nearly 5% to close at $23.83, as at least eight underwriter banks including Citigroup (C), Credit Suisse and Goldman Sachs GS , reportedly assigned a buy rating to the stock, given the monetization opportunities. However, other underwriters like J.P. Morgan assigned "Hold" rating to the stock. Notably, it is mandatory for underwriters of the IPO to provide research coverage as well.

The ratings have definitely baffled many as these go against the general Wall Street sentiment about Snapchat, i.e, a bearish outlook. There is an obvious hint of prejudice. However, Fortune has asked to be cautious as these underwriters have much more access to the inside information and thus ratings aren't to be dismissed outright.

Also, the recent deal with NBC Universal has assured investors of the company's growth potential.


Snap is currently stealing all the limelight. It remains to be seen whether the company can keep the excitement alive by providing a more immersive experience. We can only hope that its success will not be "ephemeral" like its messaging features.

Want to learn more about Snapchat? Check out our recent podcast with an IPO expert for additional details on the company and its prospects:

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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