Snap shares gain some ground after analyst reminds investors Snapchat isn't Twitter

Two days after Snap Inc.’s stock fell below its $17 initial public offering price, shares gained back some ground Thursday morning as an influential analyst encouraged investors to buy into the Venice company.

Shares traded as high as $15.97 Thursday morning before closing at $15.69, up 45 cents, or about 3%, from their $15.24 closing price Wednesday. That could be because Scott Devitt at Stifel, Nicolaus & Co. said in a note to investors Thursday that worries about Snap’s future growth are probably overblown.

In the note, Devitt upgraded the stock from “hold” to “buy” and said the shares posed a “compelling risk / reward opportunity.”

Devitt acknowledged investors are uneasy about Snap’s ability to grow its Snapchat app because of competition from Facebook-owned photo-sharing app Instagram and comparisons with Twitter, which has struggled to grow its user base and meet Wall Street expectations after going public in 2013.

But focusing too much on Twitter’s foibles is a fundamental misunderstanding of Snapchat’s value to its customers, Devitt said.

“Investors have always gotten disproportionate value from Twitter's service relative to the rest of society, leading to a natural bias toward buying into Twitter’s investment story even when the data looked increasingly bleak,” Devitt said in the note. “Many of these individuals don’t use or understand Snap (yet), leading to a negative bias despite healthy underlying growth trends and compelling upside if Snap executes on monetization.”

Devitt is also bullish about Snap’s ability to drive revenue through advertising despite concerns over stagnant user growth. He kept the company’s price target — the amount a stock is projected to be worth after a 12-month period — steady at $22.

Snap said in a May earnings report that its signature app had 166 million daily active users, well below the 250 million viewers who use Instagram Stories — a feature that emulates one of Snapchat’s defining features.

Snap Inc. opened at $17 on the New York Stock Exchange in March, and shares surged above $20 in the first days of trading. The stock has been on a downward trajectory ever since.

Next month, those who owned shares in Snap before it went public will be able to sell their holdings, making available an estimated 950 million additional shares, according to the note. Despite widespread fears that a sell-off will drive prices even lower, Devitt remains optimistic, arguing that insiders will probably opt to hold onto their stock rather than sell below the IPO price.

“We think investors’ anticipation of the event could be more impactful to the stock than actual selling from the lock-up expiration,” Devitt said.

ethan.varian@latimes.com

@ethanvarian


UPDATES:

2:05 p.m.: This article was updated after the close of markets.

This article was originally published at 12:15 p.m.

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