A Bank of America Analyst Justin Post has elaborated on the reasons the bank lowered ratings on Snap and Pinterest.
To Justin, the ratings were adjusted to reflect what the bank thinks will be another 2-3 quarter “recovery” trade.
BoFA continues to see Snap and Pinterest as strong secular growers, expect strong 1Q channel checks to aid stocks ahead of 1Q results, and anticipate acceleration in growth in 2Q.
Yet, the bank think investors may become increasingly concerned on tougher 2H comps, especially in context of a broader economy that should be accelerating.
While the anticipated acceleration in sector revenue growth in 2Q will likely be a positive data point, BoFA’s call is that high-multiple stocks could be range bound on valuation and that there would be better 2H reopening ideas with likely acceleration versus deceleration.
The BoFA saw a similar dynamic for the early COVID eCommerce beneficiaries (Amazon, eBay, Wayfair) from September-December.
BoFA notesthat both Snap and Pinterest trade well above historical averages on P/S, and well above Facebook in 2013-2016 at 9-13x forward P/S when revenues were growing above 50% and margins were expanding.
For Snap and Pinterest, BoFA 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.