Snap, the disappearing message app, went public at $17 per share on March 2, 2017. ▪ Over the next three weeks, 14 unaffiliated analysts (i.e., those not serving as underwriters for the IPO) made investment recommendations on Snap: two with buy recommendations, six with holds, and six with sells. ▪ When the "IPO quiet period" expired, 16 more analysts, including analysts from Morgan Stanley and Goldman Sachs, the IPO's lead underwriters - issued recommendations: 10 with buys and 6 with holds. These affiliated analysts gave price targets ranging from $21 to $31 compared to the current market price of $23.

 

Elizabeth Kemp, the portfolio manager of a long-only technology fund, had to decide to harvest the gains from the 500,000 IPO shares she owned or to double down and buy more shares. ▪ This decision depends in large part on her belief about how much Snap shares are actually worth: are they worth more than the current market price of $22.74? ▪ Students can calculate a DCF value for Snap shares using Morgan Stanley's model and assumptions; and have the opportunity to analyse the analysts' divergent recommendations and explain why they differ. There is the possibility that Nowak might be both more informed about Snap and at the same time, more conflicted given Morgan Stanley's role as the co-lead underwriter for the IPO.

 

1. What should Elizabeth Kemp do: buy more Snap shares or harvest her gain by selling shares?
2. How much is Snap worth per share? Assess the reasonableness of the key inputs in Morgan Stanley's valuation analysis.
a) The WACC of 9.7%
b) The terminal value growth rate of 3.5%
c) The Free Cash Flow forecast in general and Snap's 2020 revenue forecast in particular.
3. Which analysts to you is more credible: Brian Nowak from Morgan Stanley or Kip Paulson from Cantor Fitzgerald? What explains the differences in their recommendations?
4. Explain the IPO underpricing anomaly. To what extent do we observe this anomaly in Snap IPO? Did the underwriters of the Snap IPO do good job?

 

Document the assumptions you have made (if any) that are not in the case
Show calculations and results as an appendix

Answer rating: 100% (QA)

1 In order to determine whether Elizabeth Kemp should buy more Snap shares or harvest her gains by selling shares she would need to assess her belief about the true value of Snap shares compared to th... View the full answer