Snap Under Pressure After Downgrade

Snap Inc. (SNAP) is trading lower by more than 1% in Monday’s pre-market after Bank of America Securities downgraded the stock.  Analyst Justin Post dropped his rating to ‘Neutral’, citing high valuation after 2020’s historic gain, noting that additional multiple expansion is “unlikely” in coming quarters. The downturn continues an intermediate correction that started after the social media provider posted an all-time high at 73.59 on Feb. 24.

Traders Grow Skeptical

The downgrade comes less than two weeks after CEO and co-Founder Even Spiegel boasted that Snap could see 50+% revenue growth “for a few years”.  He detailed his optimistic view, expecting app penetration to reach 50% of smartphones in the United States. He also insisted the company could capture up to 2% of the U.S. advertising market due to users’ depth of engagement. Market players took a more skeptical view, dumping the stock 15% in the next two sessions.

The analyst explained his rationale for the downgrade, noting, “we think investors may become increasingly concerned on tougher 2H comps, especially in context of a broader economy that should be accelerating. While the anticipated acceleration in sector revenue growth in 2Q will likely be a positive data point, our call is that high-multiple stocks could be rangebound on valuation and that we have better 2H reopening ideas with likely acceleration vs deceleration”.

Wall Street and Technical Outlook

Wall Street consensus remains upbeat despite worries about valuation, with an ‘Overweight’ rating based upon 26 ‘Buy’, 1 ‘Overweight’, and 11 ‘Hold’ recommendations. One analyst now recommends that shareholders close positions. Price targets currently range from a low of $40 to a Street-high $95 while the stock is set to open Monday’s session about $23 below the median $80 target. This low placement strongly suggests that Main Street disagrees with the bullish assessment.

Snap topped out at 29.44 one day after coming public in March 2017 and entered a decline that posted an all-time low in 2019. The subsequent recovery wave reached the prior high in October 2020, yielding a breakout that booked high percentage gains into the February peak. A selloff into early March found support at the 50-day moving average but Monday’s downturn signals a second test at that level, with a breakdown exposing additional downside into the mid-40s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.