Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

Should You Buy Snap Inc (SNAP) and LendingClub Corp (LC) Shares on Weakness?

With prices falling, does the reward now outweigh the risk for SNAP and LC?

Buying on the dip is a tried-and-tested investing strategy. But buying when prices are weak only works when the stock has a real prospect of recovery. A vague idea of some possible recovery somewhere in the future is not an enticing prospect when choosing where to spend your hard-earned cash. That’s why, out of the two stocks below, risky Snap Inc (NASDAQ:SNAP) has a lot of work to do before it becomes a viable investing opportunity- even at these reduced-price levels. However, LendingClub Corp (NYSE:LC) could be an interesting stock to monitor right now with prices down by over 20%. Let’s take a closer look at the outlook for these two stocks now:

Snap Inc.

Shares in disappearing photo app Snap are trading lower following the release of weaker-than-expected earnings results for the third quarter. In early trading Wednesday, prices crashed from $15.40 to $13.44. SNAP investors should be very worried as today four separate analysts have moved to downgrade their ratings on the stock.

So should you invest in SNAP on weakness? We would say it is best to hold back right now due to the extreme uncertainty surrounding SNAP’s outlook. Let’s take a closer look just why the risk is to great on this volatile stock to make a compelling investing opportunity at this point. Crucially, for the third quarter, SNAP reported daily active users (DAU) of 178 million- up 3% from the previous quarter. However, this did not meet expectations: GBH Insights, for example, had been anticipating DAU of closer to 182 million. Meanwhile, total revenue also disappointed at $208 million versus the Street estimate of $236 million.

In fact, results for the quarter were soft in almost every segment as it changes its strategy and transitions to programmatic ads. Back in October, SNAP revealed that it was planning to run more programmatic ads, which are ads bought on software and not through human negotiations. The company’s CEO Evan Spiegel blamed this for the poor revenue growth. “I am grateful this transition is nearly behind us and look forward to the many advantages our programmatic auction brings to our advertising business in terms of scale and ROI,” says Spiegel.

But the most worrying part for investors is that SNAP does not offer any guidance for the current/ future quarters. This makes it very difficult to try and assess the company’s outlook going forward. Indeed, GBH Insights writes: We note with SNAP not giving guidance, Street expectations are all over the map and remain a frustration among investors that further clouds the story.” The company must be able to grow its DAU while effectively monetizing user engagement in an effective way in order to turn this story around. However investor patience is wearing increasingly thin as SNAP takes yet another step backwards rather than forwards.

On the other hand, the stock has managed to retain some staunch supporters. For example, there is five-star Drexel Hamilton analyst Brian White. He made the controversial decision to assign a buy rating on SNAP today with the stock’s highest price target of $28. Even though he trimmed his target from $30, this still suggests SNAP has over 85% upside potential from the current share price. “Despite rapid growth, there continues to be a disconnect between Snap’s quarterly results and Wall Street’s expectations; however, we believe the company is making the tough decisions that will allow Snap to emerge a stronger company in 2018” explains White.

Overall analysts are very divided on SNAP’s outlook. We can see from TipRanks that the stock has a Hold analyst consensus rating. Over the last three months, this breaks down into 6 buy, 15 hold and 7 sell ratings. Meanwhile, thanks to the lower share prices, the average analyst price target of $14.11 now stands at an upside from the current share price.

LendingClub Corp

California-based LendingClub is an online peer-to-peer lending company. It was actually the first peer-to-peer lender to register its offerings as securities with the Securities and Exchange Commission (SEC), and to offer loan trading on a secondary market. However, LC shares crashed in after-hours trading by over 20% as the company cut back its revenue and profit guidance for the full year. Shares had already dropped by 6.6% during the day on November 7.

The weak guidance comes despite assurances from LC CEO Scott Sanborn in August that the company was “back on the front foot.” He had told investors to expect revenue of $600 million with net loss of $65 million for the full year. Now however, Sanborn has changed his tune. Investors are now looking at a net loss of about $67m, on about $579m of revenues.

Nonetheless there is still a bright light out there for LC according to Oppenheimer and Maxim Group. Both of these firms reiterated their buy ratings on the stock today with price targets of $6.25 and $8 respectively. Considering the stock is now trading at under $4.5 this suggests big upside potential. Oppenheimer’s Jed Kelly is a five-star analyst with a strong track record on LC stock specifically. He says that shares have been “oversold” and calls the issues “transitory”. Plus he notes that the investor’s day next month serves as an immediate catalyst for the stock. On this day, December 7, management will reveal its 2018 guidance and long-term initiatives

“We believe strong borrower demand (applications +58% y/y) and a wider investor base can support profitable growth in 2018, and at 10x our ’18E EV/EBITDA, valuation is not stretched, in our view” says Kelly. Note that he does reduce his price target from $7.50 to $6.25 to account for the lower guidance, but ultimately, he concludes that “the risk/reward as very compelling at current levels.” He is hoping that the company’s differentiated business-model will help it create a “sticker investor base” that will help LC “drive higher profitability to support outer-year multiple expansion.”

From TipRanks we can see that LC has a cautiously optimistic Moderate Buy analyst consensus rating. This reflects the fact that in the last three months, the stock has received 4 buy ratings and 3 hold ratings from analysts. The average analyst price target of $7.13 now stands at considerable upside of 30% from the current share price.