Snap's Unproven Monetization Potential Doesn't Deserve To Trade At A Premium To Facebook

The Bears March In

By Friday morning, Wieser no longer holds the title of Wall Street's lone bear on the stock. Analysts at Atlantic Equities downgraded Snap to Underweight from Neutral with a $14 price target.

Atlantic Equities' James Cordwell argued that Snap's stock is overvalued at its current levels. Specifically, at $24 per share the stock is trading at a premium to the social media giant Facebook Inc FB on an EV-to-time spent basis. Based on this metric, the stock is pricing in the assumption that Snap will be in a better position to monetize its engagement better than Facebook can. Cordwell suggested that Snap won't be better than Facebook in terms of monetization given its less extensive user data.

What If Users Just Spend More Time On The Platform?

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The analyst added that while the case could be made to justify Snap's valuation based on user metrics, he isn't convinced. Snap managed to both grow its daily active user base at an 18 percent annualized rate in the bottom half of 2016. This rate of growth may be unsustainable given the platform's already 70 to 75 percent penetration of the 13–24-year-old market and competition from other social media peers, specifically Instagram.

The argument could be made that Snap's bottom line can also grow by encouraging current members to spend more time on the platform. But there is no sign of this gaining any traction since users have been spending 25 to 30 minutes on the platform for the past 12 months.

This isn't giving the analyst any conviction that rapid growth from existing members can be seen. But even if this does occur it will likely come at the expense of incremental costs, which will add further pressure to structural margins.

Bottom line, the analyst argued that even though Snap's valuation is "exceedingly stretched," the stock will trade at least in the near term on factors other than the company's fundamentals.

At last check, shares of Snap were up 10.20 percent at $26.98.