Recent Downside In Snap Shares May Be An Overreaction; Stifle Upgrades To Buy

Snap Inc SNAP shares have taken a beating this week and are trading below its IPO price, but Stifel analyst Scott Devitt believes now might be the time to buy in on the dip.

“Despite concerns in the market and persistent comparisons to Twitter Inc TWTR, we believe Snap's business remains on track fundamentally as it continues to develop innovative consumer products and increasingly sophisticated tools for advertisers. We view shares as a compelling risk/reward opportunity,” Devitt wrote.

Devitt upgraded Snap shares from Hold to Buy with a price target of $22 (see his track record here).

Investors May Be Overreacting

Snap’s management team is set to sell an additional 950 million shares next month, and roughly 60 percent of these shares are held by Snap’s directors and named officers. Devitt believes since shares have fallen below the initial IPO price, “investors’ anticipation of the event could be more impactful to the stock than actual selling from the lock-up expiration.”

Snapchat Has Been Able To Hang With Its Competition

Devitt noted that while sentiment around the stock may be down, it is not nearly as bad as it seems.

“Downloads of the Snapchat app have appeared relatively stable in all of the company’s key ad markets (i.e. markets that drive revenue) since late 2016; in these key markets, the Snapchat app’s rankings look remarkably similar to Instagram’s despite frequent speculation that Instagram’s Stories product is damaging Snap’s user growth,” he said.

On top of that, engagement with the app remains very strong as the company reported that currently 3 billion snaps are created per day, which is up from 2.5 billion in Q3 of 2016.

Snapchat’s Future

Overall, it is clear Devitt believes investors are misunderstanding and not properly valuing Snapchat.

“In our view, Snap is what investors have long wanted (and many still want) Twitter to be; a thriving communications platform for hundreds of millions of high-value consumers whose nimble product innovation can drive engagement/monetization in the face of competition from internet behemoths like Alphabet Inc GOOGL, Facebook Inc FB, and Amazon.com, Inc. AMZN,” Devitt concluded.

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