Why Snap shares are plummeting days after its successful IPO

Snapchat co-founders Bobby Murphy, left, chief technology officer, and Evan Spiegel, chief executive, ring the opening bell as Thomas Farley, president of the New York Stock Exchange, looks on March 2. (Drew Angerer/Getty Images)

Snap, the parent company of the popular social-media app Snapchat, had a blissfully smooth IPO process that exceeded expectations.

But it turns out some of the company’s new investors may be as fleeting as the messages that users share on the app.

Less than a week after the company celebrated its first day of trading on the New York Stock Exchange, the stock is down sharply. After falling as much as 12 percent during the day, Snap shares closed down by about 10 percent Tuesday. At $21 a share, the company marked two straight days of losses and landed below the $24 it closed at on its first day of trading. The losses may be a sign that some investors are having doubts about the company’s long-term potential, stock analysts say.

“A stock like this is going to be incredibly volatile because there’s so little information about the company’s track record and it’s difficult to extrapolate to the future,” says Brian Wieser, a senior analyst at Pivotal Research Group.

Snapchat, which was launched in 2011 by Stanford University students, set itself apart from other social apps by specializing in ephemeral messaging. The messages or “snaps” that users send disappear within minutes or hours and are animated by splashy filters that give users doe eyes, bunny ears and funny voices. The company also has partnerships with media companies, including The Washington Post, that use the platform to share videos and articles.

Many analysts from top investment research firms such as Pivotal, Morningstar and asset management firm Needham have labeled the company as overvalued since it debuted Thursday, citing a short track record, a slowdown in user growth and fierce competition from other social-media companies. Morningstar analyst Ali Mogharabi said the company would be fairly priced at $15 a share. Wieser, who is even more bearish, set the target price at $10 a share.

When Snap filed for the IPO last month, the company said that its losses were growing: it posted a net loss of $372.8 million in 2015 and a net loss of $514.6 million in 2016. It also warned that it “may never achieve or maintain profitability,” a cautionary note that has also been offered by some other tech companies, including Twitter and Etsy.

Another major challenge for Snap, which earns most of its revenue from selling advertisements, is that it may face an uphill battle competing against other giants in the space, such as Facebook, analysts say. In a report published before the company’s IPO, Morningstar’s Mogharabi wrote that Snap’s competition is “overwhelming.” Laura Martin, an analyst for Needham & Company, warned in a note to clients this week that other companies are stealing Snap’s best ideas.

There are also concerns about the company’s user growth. In a regulatory filing, the company touted a user base of 158 million people who send 2.5 billion messages every day. Some analysts question whether Snap can continue to gain customers or grow revenue amid steep competition from other social-media companies. The company has already experienced a slowdown in user growth, citing “technical issues” as part of the reason.

Because of these factors, analysts say the company is pretty young and still needs to prove that it can be profitable in the long run.

Still, the stock’s early performance may not be an adequate measure for how it will do in the long run. Facebook, for example, also sold off shortly after its IPO and saw its stock price fall by more than 40 percent in the four months after it hit the market in May 2012. But it was able to recover and, at $137 a share, is now up 360 percent from its $38 IPO price, a rise analysts credit to its large global user base and success with mobile advertising.

Twitter, in contrast, peaked at $69 a share about two months after it debuted with an IPO price of $26. But today, amid disappointing revenue and slow customer growth, Twitter trades at $15 a share.

“It’s tough to tell,” Mogharabi says, adding that Snap will have to continue to offer innovative features if it wants to stay in business. “The valuation of the stock certainly represents a lot hopefulness.”