Here’s Why One Analyst Thinks Snap’s Shares Won’t Crater
Ever since Snapchat’s parent company, Snap Inc., went public last week, investors and analysts have been debating whether the company is actually worth its $25 billion market value—with some short-sellers making significant bets that it isn’t.
At least one analyst, however, believes that even if Snap’s stock falls from its current lofty height, its downside is limited. Why? Because he believes that Facebook—which tried to buy the company in 2013—is still interested in acquiring it, and that it would do so if the company’s price were to fall below a certain point.
In a research note released on Thursday, FBN Securities analyst Shebly Seyrafi initiated coverage of the video-based messaging company with a “sector perform” rating and a price target of $23.
Seyrafi said that Snapchat is still hugely popular with millennials and that it has continued to innovate with new features. But even if growth were to slow and the stock price were to fall, the FBN analyst argued that it would probably not fall below the $14 mark.
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“One of the key points that the bears on SNAP may be missing is that we believe that FB would love to acquire the company, and it could be willing to pay at least $20B+ ($14/share) for the asset,” the analyst wrote, using Facebook’s stock ticker symbol. “If this is so, then investors in SNAP effectively have a ‘put’ at around $14/share,” he said, using a Wall Street term for a guaranteed sale.
Seyrafi pointed out in his note that Facebook paid more than $21 billion to acquire WhatsApp, a messaging service it bought in 2014.
Although the analyst admitted that WhatsApp—whose service started as a replacement for SMS for many users in developing countries—had more users than Snap when it was acquired by Facebook, it also had virtually no revenue. Snap, by contrast, had $400 million in revenue last year and is projected to have more than $1 billion this year.
There’s no question that Facebook is still interested in Snap, since it regularly introduces new features for both its main platform and standalone services like Instagram that essentially duplicate what Snapchat does. For example, Facebook Messenger just added a feature similar to Snapchat’s Stories, which allow users to share collections of videos and images.
But would Facebook want to spend $20 billion to buy the company? It has a strong enough balance sheet to do so, as Seyrafi notes in his research report, with a market value of $400 billion and $25 billion in cash on its books. But then again, the giant social network might also decide that it is having just as much success by competing with Snap as it would by acquiring it.