The changing sentiment about Snapchat among stock analysts reflects the confusion and doubts both about Snapchat’s strategy and its ability to execute on that plan.Lucy Nicholson/Reuters
Investors know what an Internet company is supposed to be. It throws open its doors to the world. More people spending time on Google and Facebook translates into more opportunities to show advertisements and generate revenue. Investors understand and like this Internet species.
But Snapchat is an oddball. It's like one of those blind salamanders that has evolved to thrive in dark caves. By conventional Internet salamander standards, Snapchat just seems weird. Maybe even ugly. It doesn't necessarily want the masses. It's focused on addicted fans in affluent countries. And outsiders don't know what to make of Snapchat – even the people who should know the company the best.
The latest example of uncertainty is the continuing change of heart from the stock analysts at Morgan Stanley. Like many of its peers on Wall Street, Morgan Stanley was initially enthusiastic about Snapchat. Soon after parent company Snap Inc. went public at $17 (U.S.) a share in early March, the firm estimated shares could reach $28 within a year. Then on Tuesday, for the second time since the IPO, Morgan Stanley cut its stock target, now just half of the March target price.
As the lead bank on Snapchat's IPO, Morgan Stanley's research analysts likely had more access to company executives than their peers. All that information didn't prevent them from misjudging a company they swooned over five months ago. The analysts now say it's taking longer than expected for Snapchat to crank up its advertising machine.
I'm not trying to pick on Morgan Stanley for its flip-flop. It's a fool's errand to predict the long-term finances of a company with a short history. Across Wall Street, people are editing Snapchat spreadsheets like mad. On average, analysts expect Snapchat to generate $1.6-billion in revenue in 2018, down from estimates of more than $2-billion in April, Bloomberg data show. The average price target has gone from $24 to less than $16.
Snapchat is particularly tough to evaluate because its advertising business is only two years old, and it has a different strategy from other Internet companies. Mark Zuckerberg's mission for Facebook was to connect the world. Snapchat's goal is winning hard-core fans in countries with the most robust advertising markets and fast cellular connections so Snapchat's video-heavy app works at a reasonable cost. The idea is Snapchat can hook the billions in India and Nigeria later if the countries' mobile networks and advertising markets improve. It's pragmatic but also a relatively untested philosophy for a big Internet company.
Snapchat is not doing stock analysts any favours in trying to appreciate the company's unusual ways. For one, Snapchat doesn't give a fig about the rigged but conventional Wall Street expectations game. The company doesn't disclose its financial expectations. Not giving guidance is a sensible decision, but it results in some wayward numbers and crazy stock gyrations when half-baked analyst estimates meet financial reality. As a result, shares have stumbled after each of Snapchat's first two quarterly earnings reports as a public company.
Six months of stock trading doesn't make or break a company, but it matters that shares are 13 per cent below Snap's IPO price. Advertisers might think twice about pouring money into a digital hangout with negative headlines. And Snapchat should want investment funds who bought IPO shares to feel good so they'll buy more stock in the future.
Second, Snapchat isn't a great salesman for itself. Its CEO hasn't always articulated clearly the company's strategy to focus on the most valuable users over the masses. And the company is schizophrenic about people sizing it up against Facebook. One the one hand, Snapchat chafes at the comparison to what it implies is a user-growth obsessed Facebook that chases everyone no matter how fleeting their use or profit potential.
But Snapchat also benefits from this comparison. Facebook did all the hard work of creating a new type of advertising based on people's identity and what they do on smartphone apps. Facebook also proved to companies that selling breakfast cereal and movie tickets to people as they scroll on their phones can work insanely well. Facebook and Google showed investors the financial potential of tailored mobile advertisements. Snapchat can now follow and improve on that blueprint.
The changing sentiment about Snapchat among stock analysts reflects the confusion and doubts both about Snapchat's strategy and its ability to execute on that plan. In the short term, this anxious state will last as long as Snapchat doesn't seem to care about outsiders' perceptions of its wisdom and ability. Over time, Snapchat's results will speak for themselves for good or for ill.
Shira Ovide is a columnist with Bloomberg News.