Wells Fargo Initiates Snap At Hold Amid 'A Trifecta Of Over-Optimistic Assumptions'

Snap Inc SNAP has been one of the most polarizing stocks among investors since its IPO at the beginning of the month. The sentiment among investors has ranged from very bearish to optimistically bullish. Wells Fargo has jumped on board the ratings train but takes a more neutral stance, initiating coverage of the social media company with a Market Perform rating and a $20–22 valuation range.

Valuation

The bank said Snap’s valuation “embeds a trifecta of possibly over-optimistic assumptions,” which are:

1. "User cohorts will continue to meaningfully expand."
2. "Snap’s advertising platform utility will grow to rival leading competitors."
3. "Snap will succeed in achieving significant leverage on a model with demanding bandwidth and computing requirements."

Broad Optimism, Unsure Profitability And Short-Term Positives

Amid broad optimistic Street sentiment toward the company coupled with the company's own claims it may not be profitable any time soon, Wells Fargo does expect the company to exceed Street estimates in the short term. While Snap’s engagement with a tougher-to-reach younger demographic appears to be most compelling for advertisers, Wells Fargo also sees this as a liability, potentially limiting access to the big spenders who want to reach a wider audience.

“Based on our estimates, we believe Snap’s current impression-based monetization may already be substantially higher than indicated by blunt ratio analysis,” said Wells Fargo. “We view potential investment positives including a large and highly engaged audience and rapid revenue growth as counterbalanced by a number of risk factors and relatively rich valuation.”

According to a recent report from Fortune, the company is losing more money than Twitter Inc TWTR and Tesla Inc TSLA combined, with an expected loss of $2 billion in 2017. One of the biggest risks surrounding Snapchat was that its competitors Facebook Inc FB and Instagram were stealing its features. The company may have reversed this trend, however, channeling Facebook and unveiling a new search feature, perhaps deserving credit for sending shares up 2 percent Friday.

Related Links: