Shares in US tech hotshot Snap dropped below their IPO price for the first time as fears grew the company was overpriced now rival app Instagram has muscled in on its act.
Snap went public on March 2 at $17 per share, and by the following day had hit $29.44 – a 73% increase.
Since then, however, Snap’s share price has tumbled and is now trading at $16.99, while Morgan Stanley has downgraded its forecast.
Tech sector down
Snap’s not alone, however – the tech sector of the S&P 500 index of leading US stocks dropped 5% in just a few weeks from a 12-month high of 1177.75 on June 8 to 1115.40 on July 3, before recovering slightly to its current level of 1140.96 (July 11).
Apple’s price alone dropped 8.4% from $155.37 on June 7 to $142.27 on June 16, before recovering slightly.
So is Snap part of a broader trend, or does it have special issues? Many analysts fear the latter. Many of its best features have been adopted by Instagram, now owned by Facebook.
Time Warner deal
And while Snap has 166 million daily active users, Instagram has 250 million. Snap had issues with its Android app towards the end of 2016, which hit its overseas market.
On the plus side, it has signed a $100m deal with Time Warner to provide video content on the app, and for advertising.
Snap has also bought up French social mapping startup Zenly, which uses GPS positioning to allow users to share their locations. While Zenly will continue as a separate app, that functionality has already been imported into Snap, according to Techcrunch.
'Sector still strong'
Laith Khalaf, senior analyst at Hargreaves Lansdown, believes the overall outlook for the tech sector is still strong.
“If you zoom out and take a wider look at things over the past five to ten years, the sector has done very well,” he said. “It’s probably a case of looking at individual companies.
“You have stuff in there like Amazon which is trading on a tremendously high multiple because it has a lot of anticipated growth built into its valuation, whereas stocks like Apple and Google are more reasonable valuations.”
He said it was difficult to say whether Snap was still overpriced. “That’s one of the challenges of investing in tech stocks, particularly ones that have very high user numbers but very little in the way of earnings visibility, in terms of monetising that user base.
“If you take a normal company you take the earnings and the price of the company and that gives you an easy way of valuing it.
“If you are talking about a company where a lot of those earnings are in the future, then you only have forecasts for those earnings to base that valuation on, and that therefore adds a large area of subjectivity.
“The idea of whether something is undervalued or overvalued really comes down to whether those earnings forecasts come home to roost, or whether they are missed or even surprise on the up-side.”
He said while investors were justified in buying into and coming tech companies such as Snap, they should be aware of the potential down-side risk.
“If investors are going for something like that, you just have to accept it’s subject to a high degree of uncertainty in terms of delivering profitability. There is no problem with that providing you have a diversified portfolio and don’t put 100% of your pension portfolio into it.”