Sigh, Wall Street. Sometimes you are too predictable.
The floodgates opened Monday on the first batch of Snapchat stock recommendations from the research divisions of the company's IPO banks. In principle, this research is independent of the firms' banking arms that guided Snap Inc.'s initial public offering earlier this month. Nevertheless, the analysts are predictably bullish on a company that generated millions of dollars in fees for their employers' investment banking divisions.
Analysts of 13 banks that were underwriters on Snapchat’s IPO have issued recommendations on the company’s shares. Among those analysts, 69 percent issued "buy" recommendations or the equivalent, with a median price target of $27, according to an analysis of Bloomberg data.
Of the 14 analysts whose firms didn’t work on the Snapchat IPO, only two (14 percent) said the company's stock was worth buying. The median price target among those unaffiliated analysts is $21 a share.
The ratings divide isn’t great for the already spotty reputation of investment banks. There’s a perception that Wall Street firms score brownie points by offering generous stock research to land investment banking clients. It’s not always true, but every time the analysts at IPO banks are more kind than their peers at firms that didn’t have a hand in a hot IPO, it fuels the perception of Wall Street grade inflation for favored clients.
You may remember that overly enthusiastic research by IPO banks during the dot-com boom was among the Wall Street behavior that Eliot Spitzer attacked when he was New York attorney general. And even since then regulators have found that stock research isn't always independent of big banks' lucrative investment banking activities.
Shares of Snapchat were up about 4.5 percent Monday in a market that is otherwise heading south. Trading has been bumpy, which is the typical pattern for hot public market newborns. Snapchat shares are about 40 percent above the IPO price but a touch below the price at which the broader public could first own them when the stock started market trading on March 2.
Snapchat also had some of its zippiest stock gains last week, which may raise questions about whether stock traders were anticipating the glowing report cards from the underwriter analysts. Some analyses have found stock prices of newly public companies tend to jump before the release of the first batch of stock recommendations from the underwriter banks -- perhaps as traders anticipated optimism from big bank analysts. Shares of Snapchat rose 16 percent last week, the only positive weekly gain for the stock since Snapchat went public at the beginning of the month.
In the long run, the bullish analysts working for Snapchat's IPO underwriters may prove to be correct. Snapchat's future is particularly tricky to predict because it is so young. But as usual, when Wall Street research divisions have rose-colored glasses, it's fair to wonder whether they're seeing dollar signs in their eyes.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Banks stick to a quiet period before they start releasing analyses on the companies they recently guided in initial public offerings.
To contact the author of this story:
Shira Ovide in New York at firstname.lastname@example.org
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Daniel Niemi at email@example.com