Why Shares of Snap Inc. Are Up Today

By Timothy Green Markets Fool.com

What happened

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Shares of Snap Inc. (NYSE: SNAP) surged on Monday after various banks that had a hand in the company's initial public offering rated the stock positively. Snap had previously received largely negative ratings from other analysts, which contributed to the stock's poor post-IPO performance. Snap stock was up 6% at 2:30 p.m. EDT to about $24.10 per share.

So what

With the 25-day quiet period following Snap's IPO, the positive commentary poured in on Monday. Analysts from Citi, Morgan Stanley, Goldman Sachs, RBC, Credit Suisse, and Jefferies, all underwriters of Snap's IPO, gave the stock buy ratings, with price targets as high as $31 per share.

Image source: Snap Inc.

Snap stock peaked around $27 per share soon after its IPO, then fell below $20 per share due in part to a deluge of negative analyst sentiment. Common complaints included an eye-popping valuation, inexperienced management, and the complete lack of voting rights for investors buying the common stock.

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With this flurry of analyst upgrades, Snap stock has partially recovered. The company is now valued at around $26 billion, despite producing just $404 million of revenue last year, along with a $514 million net loss.

Now what

Snap is only in the early innings of monetizing Snapchat, and it's unclear whether its overwhelmingly young user base will stick around if ads start showing up more frequently. Facebook has copied Snapchat's core features into both its Instagram and Messenger apps, raising questions about Snap's ability to grow its user base.

Snap will need to grow at an incredible pace, and turn profitable sooner rather than later, to justify all of these buy ratings. With shares of Snap trading for more than 60 times sales, investors buying the stock are taking a massive leap of faith.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.