Snap Dips Below IPO Price, Are There Parallels With Facebook?

Snap’s (NYSE:SNAP) stock dipped below its IPO price for the first time, closing down 1.1% at $16.99 in Monday’s trading, amid investor concerns regarding the company’s long-term growth prospects.  Falling below the IPO price is not an uncommon occurrence; in fact, social media titan Facebook saw its stock trade at below IPO levels for over a year following its listing. Facebook now trades at about four times its IPO price. So are there any parallels between Snap’s current decline and Facebook’s initial hiccups? In this note, we briefly compare the early performance of the two companies and some of the factors that impacted their early valuations.

We maintain a $17 price estimate for Snap, which is in line with the current market price.

See Our Full Model And Analysis For Snap Here

Facebook Lagged Post IPO On Account Of Overpricing, Mobile Concerns 

Facebook’s stock closed below its IPO price of $38 in the second day of trading after it listed in May 2012. The stock fell by over 50% over the next few months and it took over a year to return to IPO levels. The initial decline was likely due to the fact that the stock was perceived as being overpriced at the time of its debut. Moreover there were concerns that the company wasn’t able to adequately monetize its fledgling mobile advertising business the same way it did with its desktop advertisements. That said, Facebook remained a dominant (and fast growing) social networking player, with no real competition to speak of, even as its stock underperformed. The company was also stable from an operational standpoint, posting net profit margins of about 27% the year before its IPO. Facebook was eventually able to remove the negative sentiment over its stock, as it executed well on its mobile strategy, while expanding its reach via a mix of savvy acquisitions that helped it to grow its revenues by over 5x in the last four years. The company also effectively doubled its monthly active user base to about 2 billion users over the same period.

Slow User Growth, Facebook’s Platform Casting A Shadow On Snap 

Snap’s stock fell below its March 2017 IPO price of $17 after testing highs of roughly $27 shortly after its debut, as a dearth of other high-profile tech IPOs bolstered demand. While the company’s lackluster Q1 results and subpar user growth (the most relevant performance yardstick for young social networking companies) were responsible for a sharp correction in the stock price, Snap’s biggest problem remains Facebook. Platforms – rather than features – provide the biggest competitive advantages in the internet era. While features can often be copied, platforms take time and a lot of heavy lifting to build. While Snap has been creative in rolling out hit products favored by younger users, Facebook has been quickly copying them and rolling them out to its vastly larger user base (related: Can Snap Move Beyond Being Facebook’s Innovation Lab?). Given Facebook’s assault, there are concerns regarding Snap’s long-term monetization prospects. The company’s net losses exceeded revenues last year. While Snap is positioning itself as a more niche platform targeting millennials and young users who are relatively difficult to reach via traditional media, investors seem skeptical, as social media often tends to be a winner-takes-it-all market.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research