Weekly Wrap: Snap's IPO Takes Off
We see the Snapchat parent as overvalued today. Plus, difficulties pinning down defense spending, and Salesforce.com delivers.
Scott Halver: Snap, Inc. goes public; defense spending on the rise; and Salesforce.com continues to deliver. This time on the Morningstar Weekly Wrap.
Shares of Snapchat-maker Snap, Inc. began trading on Thursday. Analyst Ali Mogharabi shares our take on the stock.
Ali Mogharabi: Founded in 2011, Snap, which refers to itself as a camera company, is a popular player in the social network space. It helps users communicate with one another mostly by using pictures and videos, or snaps, on its Snapchat mobile app.
Ultimately, Snap's competition, which includes wide-moat Facebook with billions of users, is overwhelming, in our view. In particular, Facebook's Instagram may emerge as a substitute for Snapchat. The larger ecosystems of Snap's competitors may have also created somewhat of an exit barrier for their users, which we think could further limit the growth acceleration of Snapchat users.
In our view, Snap shares are overvalued, and we would wait for a pullback and a margin of safety before investing in this very high uncertainty name.
Halver: Reports surfaced this week that President Trump plans to increase defense spending significantly, but the actual amount of the proposed increase was difficult to interpret. Analyst Chris Higgins has more.
Chris Higgins: Cutting through all the confusion, we think the bottom line for investors is defense spending is heading higher in the near term and the midterm under a Trump administration. Key dates coming out: March 16, the defense budget request will go to Congress in broad outlines. In May, we'll get some more details on that defense budget. We also think Trump will increase near-term war spending by about $30 billion sometime in the next two months.
For investors, we like Raytheon in this space, noting that it's still only fairly valued at this point, so we don't see a ton of value in the name. Other names, Lockheed Martin, Northworth Grumman, General Dynamics, look slightly overvalued at this point. We think this is because investors are pricing in steep defense spending increases with little regard for hurdles that this faces in Congress.
Halver: Salesforce.com delivered strong results to close out their fiscal year. Analyst Rodney Nelson thinks investors should take note of this software success story.
Rodney Nelson: Wide-moat Salesforce.com reported strong fourth-quarter results on Tuesday, capping off a solid fiscal 2017. The firm's platform continues to see widespread adoption while Sales Cloud, the company's largest product, is seeing resurgence and growth. Salesforce is on tap to become the first pure place SaaS company to top $10 billion dollars in annual sales in fiscal 2018. We continue to be impressed by management's ability to deliver top-line growth at such a scale, and we expect the company to deliver improved operating margin moving forward. Despite having run up more than 20% year-to-date, we continue to see value in Salesforce.com's stock compared to our $99 fair value estimate.
Halver: And in case you missed it, be sure to check out Tax Relief Week on Morningstar.com for tips on how to be more tax-savvy with your investments.
Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.