Now is Not the Time to Own Snap Stock

Snap (SNAP) shares rose 44% yesterday following the popular Snapchat maker’s initial public offering yesterday. From the eyes of Nomura analyst Anthony Diclemente, the company has gone public at a time when user growth and monetization rates are starting to “ghost” with a considerable drop-off.

In reaction, the analyst initiates coverage on SNAP with a Reduce rating and a price target of $16, which implies a potential downside of close to 35% from where the shares last closed.

For Diclemente, upside for the stock faces hurdles that boil down to the following four points: “1) already slowing growth in daily active users (DAUs); 2) slowing monetization (ARPU) growth; 3) fierce competition from larger rivals such as Facebook (FB), Instagram, and WhatsApp; and 4) rich valuation relative to current and future growth,” and therefore, the analyst asserts, “We see Snap’s revenue opportunity as constrained relative to expectations and, as such, we think shares are fairly valued at best at the IPO price.”

Between sluggish user growth rates restricting the kind of long-term revenue Snap can prospectively generate coupled with steep rivalry, with the analyst pointing specifically to last August’s launch of Instagram Stories, he continues, “As a result, higher monetization per user is likely to be the primary driver of growth, and this too is currently slowing.”

Ultimately, “Lofty valuation demands faster revenue growth despite significantly slower user additions. We believe that Snap should be valued at a modest discount to FB and TWTR multiples at the time of their IPOs in light of slowing user growth and a fierce competitive environment. As such, we do not recommend ownership of the stock,” concludes Diclemente.

As usual, we like to include the analyst’s track record when reporting on new analyst notes to give a perspective on the effect it has on stock performance. According to TipRanks, five-star analyst Anthony Diclemente is ranked #223 out of 4,513 analysts. Diclemnte has a 71% success rate and garners 11.4% in his annual returns.