No surprises here.
On Monday, Snapchat’s underwriters and their analysts released reports examining the prospects of the company’s recently sold IPO shares—and at least eight immediately gave the company the equivalent of a “Buy” rating, another four giving the stock a hold.
Their ratings helped push the stock up a as much as 5% in pre-market trading Monday.
That came after Snapchat was deemed largely a “sell” or “hold” after its initial public offering in March, with smaller Wall Street firms criticizing the social media company’s unprofitability and flagging user base.
But the giants of Wall Street, who have been roped in as underwriters for the company, told investors to, well, have faith.
“We are bullish about Snap’s ability to monetize its highly engaged daily active user (DAU) base,” a Morgan Stanley analyst wrote in a Monday note. “First, we believe Snap’s millennial audience and differentiated online video ad inventory are in demand by advertisers.”
UBS, J.P. Morgan, Stifel, and Oppenheimer were among those who gave the stock a “Hold” rating.
All were underwriters for the Snapchat IPO. On average, the 10 that did give the stock a target price said the company’s stock would hit $27.20 over the next 12 months—a 19.6% upside from the stock’s Friday close. Not counting the underwriters, the stock’s average target price would have been $19.83—or 12.8% below Snap’s Friday close.
So why is this sudden surge in buy ratings no surprise? Well…
“After the quiet period, [the underwriters] will be releasing their own research in a few weeks,” Renaissance Capital’s Matt Kennedy said in a earlier interview with Fortune. “Those are all typically going to be [buy] or hold. . .but it’s really likely [buy].”
These underwriters want to be on Snap’s good side to continue doing business, and also, to get their clients some face time, according to a Wall Street Journal report.
But don’t dismiss the ratings too quickly just yet. While it looks like a conflict of interest for Snapchat’s underwriters, there’s an argument for at least glancing over their opinions as well. First, it wouldn’t make the underwriters’ clients very happy if they recommended a failing stock. Second, Snap’s underwriters should have greater access to Snapchat’s executives, and therefore, more information about the company.
As for the firms that immediately called the firm a sell after Snap’s IPO, they too potentially have secondary motivations for that call. Such a contrarian view on such a hot stock would certainly give their own firm’s name some publicity.
At any rate, Snap now has 12 analysts in total calling the stock a “Buy,” 11 calling it a “Hold,” and now 6 calling it a “Sell.” Altogether, they’ve given the stock an average price target of $23.67.