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Snap and Pinterest slide as Bank of America downgrades the social media companies on 'positioning around reopening'

Mar 23, 2021, 00:47 IST
Business Insider
Snapchat
  • Snap and Pinterest lost ground Monday after Bank of America downgraded their ratings to neutral from buy.
  • Higher interest rates are pressuring valuations for high-multiple stocks including Snap and Pinterest, said BofA.
  • Booking Holdings, whose travel sites include Priceline.com, was upgraded to a buy rating.
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Shares of Snap and Pinterest each dropped Monday following rating downgrades by Bank of America which cited valuation concerns for the social media companies as the broader economy continues recovering from the COVID-19 crisis.

Each rating was pulled down to neutral from buy in a research note published Monday in which BofA also reduced its price objective on Snap to $67 from $78, and on Pinterest to $78 from $94.

The investment bank said "recovery stocks" are best poised to outperform in the second quarter, with an increase of vaccine availability in the US and Europe making them the best plays to position for reopening of the economies. It also said interest rates matter for valuations.

"For Snap and Pinterest, we think multiple expansion in 2020 was aided by unusually low interest rates and outsized growth for both companies in a down economy, and as conditions normalize, further multiple expansion is unlikely," said BofA analysts led by Justin Post.

Snap shares were down 2.7% following a loss of 6.4% when they hit an intraday low of $54.60. Pinterest fell as much as 4% to $70.11 then pared the decline to 1.7%. A year ago, Pinterest shares were trading above $12 each and Snap's stock was above $10.

The US economy is expected to continue digging out from the recession it was pulled into last year as the coronavirus pandemic accelerated. Investors have been pricing in expectations of higher inflation to accompany faster growth, sending borrowing costs for companies and households higher as implied by the 10-year Treasury yield. That yield has quickly climbed past 1.7% since the start of February when it was at 1.09%.

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Post said BofA now expects the 10-year yield to hit 2.15% by the fourth quarter of 2021. "Our revised interest rate outlook suggests more limited multiple expansion and flow of funds risk for the "stay-at-home" stocks under our coverage universe."

He noted that both Snap and Pinterest "trade well above historical averages" on a price-to-sales ratio.

The bank said it expects strong first-quarter channel checks at Snap and Pinterest to help its shares before the release of their first-quarter results, and it anticipates further growth in the second quarter. However, "we think investors may becoming increasingly concerned on tougher [second-half year] comps, especially in context of a broader economy that should be accelerating," said Post.

"While the anticipated acceleration in sector revenue growth in 2Q will likely be a positive data point, our call is that high-multiple stocks could be range bound on valuation and that we have better [second-half] reopening ideas with likely acceleration vs deceleration."

With that, BofA upgraded Booking Holdings to a buy rating from neutral. The company's travel websites include Booking.com, Priceline.com, and Kayak.com, and BofA sees it as a top beneficiary of a potentially material increase in European vaccine supplies by the third quarter. Booking shares were down 1.8% during Monday's session.

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