Valuing Snap After the IPO Quiet Period (A)
Posted: 12 Jul 2018
Date Written: June 5, 2018
Snap, the disappearing message app, went public at $17 per share on March 2, 2017, making its two 20-something founders the youngest self-made billionaires in the country. Over the next three weeks, 14 analysts make investment recommendations on Snap: two with buy recommendations, six with holds, and six with sells. When the “IPO quiet period” expired three weeks later, 16 more analysts — who worked at firms that served as underwriter for the Snap IPO — issued recommendations: 10 with buy and six with hold recommendations, with price targets ranging from $21 to $31 compared to a current market price of $23. Elizabeth Kemp, the portfolio managers of a long-only, technology fund at Sand Hill Road Capital, had bought 500,000 shares at the IPO and had to decide whether to harvest her gain or to double down and buy more shares.
This short (4 pages of text) case analyzes the first of three sequential analyst reports from Brian Nowak, Morgan Stanley’s internet analyst. The case series analyzes a unique natural experiment that plays out across the analyst reports, and is designed to accomplish four goals. First, to teach DCF valuation and illustrate the challenges of valuing young, rapidly growing technology firms. Second, to highlight the differences between affiliated and unaffiliated analysts — are the ones affiliated with the firms that underwrote the IPO more informed or more conflicted? Third, to illustrate how valuation is done in practice and raise questions about the methods (e.g., are DCF models used to establish price targets or to justify them). And fourth, to provide a forum in which to discuss IPO anomalies related to initial pricing and long-run performance.
Keywords: Initial Public Offering (IPO), Quiet Period, Sell-Side Analysts, Underwriters, Investment Banking, Affiliation Bias, Equity Research, Social Networks, Internet Companies, Discounted Cash Flow (DCF), Cost of Capital, Valuation, Conflicts of Interest, Corporate Governance, Online Advertising, Forecast
JEL Classification: G24, G32
Suggested Citation: Suggested Citation