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Technology

Snap's suffocating coverage on Wall Street may be stifling growth plan

Snapchat parent Snap reports earnings Thursday, and for all the investor hype and media attention surrounding it, it’s important to note one thing: Snap is one of the most extremely over-analyzed stocks relative to its overall value.

In fact, the social media company has more analysts covering it than it has billions of dollars in market cap. Not many major companies can make that claim. And the ones that do are often very problematic.

There are 21 analysts focusing on the company, according to Yahoo Finance, and its market cap before reporting earnings is around $16 billion. That means there are 1.3 analysts watching the company for every billion in value.

Consider the companies that have even more analysts than SNAP but with even less market value. They’re an infamous list with names like Chipotle, Under Armour, Foot Locker, Ulta, Coach, Trip Advisor, Viacom and Garmin.

On the other extreme end, you have the major economically important firms with over $10 billion in market cap per analyst. Tech giants like Apple, Microsoft, Facebook, Amazon and Alphabet range from $13 to $24 billion in market cap per analyst, averaging $18 billion.

Academic research suggests such heavy amounts of analyst coverage can lead companies to focus more on short-term thinking and earnings management while ignoring longer-term goals and fundamentals.

A 2014 paper by professors from the University of Illinois and University of Zurich showed that “corporate managers use real earnings management to enhance short-term performance in response to analyst pressure.”

Another study by Mark DesJardine, now a business professor at HEC Paris, showed that when analysts go away, companies can better focus on the longer term. “Firms that lose a covering analyst from a brokerage disappearance extend their attention further into the distant future,” Desjardine wrote, “and invest more in longer-term capital, compared to similar firms that do not lose an analyst.”

Source: Tech CNBC
Snap's suffocating coverage on Wall Street may be stifling growth plan

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