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Stock Watch

Is It Time to Snap Up Shares of Snap?

The owner of the Snapchat messaging app went public in March. Here’s our post-IPO take on the stock.

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No matter how much buzz an initial public offering generates, Kiplinger has a simple rule of thumb for investors: Wait at least 90 days before buying the stock. Why? Because three months allows enough time for the hype to die down and for the business picture to start coming into focus.

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To be sure, there was plenty of hype surrounding the IPO of Snap (symbol SNAP), the company behind Snapchat, a popular smartphone messaging app. And yet, the answer to whether Snap will turn into the next Facebook (FB) is no clearer today than it was when we posed the question three months ago.

Wall Street is split on the stock's prospects. Although 11 analysts surveyed by Zacks rate Snap stock either a "Strong Buy" or a "Buy," another 11 call it a "Hold." Three rate shares at "Strong Sell." Average it all up and you get a firm "Hold" recommendation on shares, by Zacks' reckoning. 

Uncertainty about the future of Snap can also be seen in its stock price. The company went public on March 2 at $17 a share. At $21.34, the closing price on June 1, it's currently about 25% above the IPO price. However, most retail investors don't get the IPO price. Based on the closing price after its first day of trading of $24.48, Snap stock is actually down 13%. In other words, the Snap IPO hasn't been such a good deal so far for many of its earliest retail investors.

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Fans want Snap to be the next Facebook, a fabulously successful company whose stock got off to a rocky start before becoming a market leader. The fear is that Snap will wind up being the next Twitter (TWTR), a social media company that has more in common with a first-round draft bust. Indeed, Twitter's prospects for growth are so uncertain that the company found no takers when it tried to sell itself in October.

And now investors are wringing their hands over Snap's growth prospects, too. The company's main product is its Snapchat app. For the uninitiated, the Snapchat mobile app integrates with a smartphone's camera and allows users to send and receive photos, videos and short messages. The messages, known as snaps, are designed to disappear within seconds of being viewed. This ephemeral nature of the app led to its early appeal. But the images don't always disappear. They can be preserved by taking a screenshot, and Snapchat has added features known as Stories and Memories, both of which allow users to store and share their snaps for longer periods.

Snapchat's user growth is a concern

Snapchat quickly caught on with a young demographic, including coveted 18- to 34-year-olds. Snap makes money by delivering advertising to this growing audience.

The trouble is that by one all-important measure, Snapchat's user growth is slowing. When Snap issued its first quarterly earnings report as a public company after the market closed on March 10, it revealed lower daily active user growth than analysts had anticipated. Shares sank on the news. Scott Devitt of Stifel, who rates the stock at "Hold," notes that Snapchat isn't expanding outside of the U.S. as much as investors expect, among other issues.

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Chalk it up to the competition. Facebook is adding Snapchat-like features to its own photo-sharing and messaging apps, Instagram and WhatsApp. Sure enough, Snapchat's decline in daily active users syncs up with Facebook rolling out those features, says Paul Meeks, chief investment officer at Sloy, Dahl & Holst, a registered investment advisory firm. "Facebook's Instagram Stories has more daily active users than Snap. Who cares if they copied Snap? If you want to invest in this theme, buy more Facebook."

Stifel analysts still think Snap can be a winner if investors are willing to ride out some short-term bumpiness. But Tom Taulli, editor of the InvestorPlace IPO Playbook and author of the book "High-Profit IPO Strategies," says Snap's future looks increasingly dim.

"After the latest earnings, Snap looks more like Twitter than Facebook," says Taulli. "The user growth was uninspiring because of Facebook. Mark Zuckerberg & Co. are going all-in on wreaking havoc on Snap -- and it's working quite well."

Investors also need to know that the 180-day lockup period for Snap stock expires on August 29. At that point, insiders who have thus far been prohibited from selling their shares will be free to do so. A sudden stampede to cash out of the stock could put pressure on Snap's share price.

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The bottom line is that analysts are pretty much split down the middle on Snap. Even the ones with bullish views urge patience. It might be too soon to write off this name, but investors needn't be in a rush to snap up shares of Snap.

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