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Snap Stock Surges 12%: Here’s Why You Shouldn’t Trust This Rally

Last Updated September 23, 2020 12:35 PM
Francois Aure
Last Updated September 23, 2020 12:35 PM

Snap. Inc shares are soaring after analysts at BTIG have turned bullish  on the outlook for Snapchat. Up more than 12% on the day, there were a couple of notes from BTIG analyst Richard Greenfield that got volumes surging in the fledgling tech company. In my view, the logic of his reasoning could be sound in the near term, but his $15 price target looks a stretch, and he could potentially be misunderstanding what is really going on with SNAP.

BTIG Upgrade Snap Inc. Price Forecast to Bullish from Neutral

snap snapchat stock
Snap stock ended the day with a 12% surge. | Source: Yahoo Finance

Here are some soundbites from his opinion and why they have suddenly turned bullish:

“Your initial reaction is likely why now and what changed, as virtually everything that could go wrong for Snapchat over the past couple years since going public as gone wrong,”

Fine, so far. Down more than 70% at its lows, Snap Inc. was one of the most over-hyped tech IPOs ever . It was incredible how many investors outside of Snapchat’s target age group were talking about how much “young people” loved the brand. Anyone in their late teens or twenties knew that they probably had it installed on their phone but hadn’t touched it for months. I remember when Instagram launched their story feature  the same week as the IPO, and I racked my brain to try and come up with a single advantage Snap had, and I couldn’t come up with one. Snap’s growth cratered 82% .

Okay, Snap fans, the filters were cool, but Facebook Messenger has that now anyway. Even the privacy feature was redundant because you sent a picture and the other person could just screenshot it , making the limited viewing period completely useless!

Back to Mr. Greenfield’s hypothesis as to why we should be confident Snap will continue to rise, this time related to revenue:

“Performance advertisers are laser-focused on return on investment and spend (and spend more) where they see a compelling return. We are increasingly confident that overseas direct response/performance advertisers are taking advantage of low relative bid prices on ad inventory in the U.S. The good news for Snapchat is that performance advertising can scale rapidly enabling meaningful revenue beats.”

Bears Bail Out as SNAP Price Rises

Okay, point taken. The company could sneak into profit, maybe. But do you think that some foreign ad sharks are going to hang around if Snap’s ad prices increase? Is this money-losing company going to be worth nearly 50% more because of an arbitrary move from the red to barely in the black? Probably not. What BTIG analysts are doing here is hopping out of their neutral view at a risk-appropriate time.

The rise in Snap is actually for a much simpler reason than the analysts (whose job is to pretend there are always structured, number-related reasons for price moves) want to tell you. The price got low, and SNAP has a sticky brand . Its numbers  have held up just well enough to warrant some speculation at the current valuation amid a broad risk-on rally in markets. This is when investors find it easy to take a glass-half-full approach.

Traders are Speculating on Snap Stock, Unlikely to be Investing

The best example I can think of is to look at Snapchat as if you were looking at an emerging markets currency on the forex market. Emerging market currencies are more volatile and tend to get hit the worst in risk-off swings but can recover strongly when a kinder wind-blows. Snap Inc. is a struggling company that lives off its brand and is fighting a losing battle with Instagram. It is cheap enough relative to its performance, however, to make it worth a gamble. As Mr. Greenfield said, things couldn’t get much worse.

So let’s call it as we see it since we don’t have to tip-toe around investors. SNAP is only being called a buy because they have screwed practically everything up, from hiring  to re-designs . The user base (may) have stabilized, and hence there is a green light for speculators to say, “Hey, this could be the floor.”

Still, when a tweet wipes $1 billion of your share price, you can see how nervous investors are about the enduring popularity of the brand.

Can Snapchat Attract the Advertisers It Needs?

There is also a sinister possibility lurking that would put the comments about better potential ad revenue in question. Have BTIG analysts ever actually used the app? Here is an interesting take on why Snapchat could struggle to be attractive to advertisers.

Okay, so we’ve seen SNAP monetize users better , fact. But HedgeEye could have a point here.

Snapchat May Form a Niche But Will Struggle to Be a Market Leader

Even if they do herd people towards ad-space, prices must rise for advertisers. At best, we will see them fill a niche beneath competitor pricing and nothing more. At worst, the user decline increases again, and the exodus begins all over. Investors don’t like apparent ceilings in potential.

The recent short-covering in Snap Inc. has people thinking market sentiment has changed dramatically, but it hasn’t. Bears are just taking some profit because their prey is showing some fight. Don’t expect them to be so kind should there be evidence of any weakness whatsoever in the DAU (Daily Average User) statistic moving forward.

Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.com.