Don't Pay Up for a Piece of Snap

Ali Mogharabi: Snap became a public company today at an IPO price of $17, above the $14-$16 range it was seeking, and the stock started trading at $24. In our view, Snap shares are overvalued, and we would wait for a pullback and a margin of safety before investing in this very high uncertainty name.

Founded in 2011, Snap, which refers to itself as a camera company, is a popular player in the social network space. It helps users communicate with one another mostly by using pictures and videos, or snaps, on its Snapchat mobile app.

It has around 158 million users and growing, and most of them are between the ages of 18 and 24. We think Snap and its users benefit from a network effect among its customer base and is starting to attract the attention and dollars of advertisers with a growth trajectory toward $1 billion in revenue. But there is no guarantee that Snap will effectively monetize these users on a consistent basis.

Ultimately, Snap's competition, which includes wide-moat Facebook with billions of users, is overwhelming in our view. In particular, Facebook's Instagram may emerge as a substitute for Snapchat. The larger ecosystems of Snap's competitors may have also created somewhat of an exit barrier for their users, which we think could further limit the growth acceleration of Snapchat users.

In terms of Snap's addressable market, while digital ad budgets keep growing, so does the number of ad inventory providers in the space, and there is no guarantee that a bigger portion of new digital ad dollars will flow to Snap. We think wide-moats like Facebook and Alphabet's Google, that have proven the value of their ad inventories to advertisers over the years and together actually dominate the market, will probably keep taking more digital ad dollars over time.