Snap Inc. Stock: Next Stop, $10?

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Snapchat's parent company is struggling to make friends on Wall Street these days. SunTrust is initiating coverage of several tech companies this week, and while most of the calls are either neutral or bullish, Snap, Inc. (NYSE: SNAP) is standing out by attracting a sell rating from analyst Youssef Squali. He's setting a $10 price target on the busted IPO, suggesting 22% of downside off of Tuesday's close. 

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Squali is just the latest Wall Street pro to dismiss Snap's recent weakness as a buying opportunity. Last week's poorly received second-quarter results don't paint a pretty picture, and Squali feels that results for the balance of the year as well as fiscal 2018 will probably continue to fall short of market expectations.

Following the money

Some of the initial Snap bulls -- largely the underwriters that took the dot-com disappointment public at $17 in March -- argue that Snapchat's grasp on young audiences make it attractive to advertisers trying to reach millennials. Young consumers are sidestepping traditional radio and television ads by turning to commercial-free streaming music and video services. However, SunTrust's Squali doesn't feel that marketers see Snapchat as a necessary advertising platform. 

Snap's top-line growth relative to its audience may suggest otherwise. Revenue soared 153% in last week's quarter despite a daily active user base that only grew at a 21% clip over the past year to 173 million people. Average revenue per user has more than doubled in that time, but a lot of these gains are low-lying fruit as Snap has only recently gotten serious about effectively monetizing its traffic. Wall Street still sees heady growth in the near term, targeting revenue to surge 83% to top $1.6 billion next year. However, with Snap now failing to live up to expectations in its first two quarters as a public company it wouldn't be a shock if it ultimately falls short of the market's ambitious growth goals.

It's fitting that Squali is also initiating coverage of Snap rival Facebook (NASDAQ: FB). Facebook, largely through its Instagram site that is growing faster than Snapchat and is now reaching a wider audience, has been more than a thorn in Snap's side. Squali is bullish on Facebook, arguing that its value to advertisers is on the rise. Facebook's data allows marketers to better target its users, and he feels that Facebook shouldn't have a problem growing at a compound annual growth rate of roughly 25% through the next five years. Profits should grow even faster given the scalable nature of its business. 

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The market has separated Facebook as a dot-com darling from Snap as a now broken IPO. Snap may be growing its top line at a substantially faster rate, but analysts are concerned at the sharp sequential deceleration of user growth and its inability to keep up with Facebook's Instagram. A sinking stock price -- this will likely be Snap's fifth straight month of closing lower -- isn't bringing out the value hunters. 

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