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

  • Snap has more analysts covering the stock than it has in billions of market cap.
  • Companies with too many analysts covering it tend to focus more on short-term gains.
Snapchat co-founders Bobby Murphy (l) and Evan Spiegel (c) ring the opening bell on March 2, 2017, as NYSE President Thomas Farley looks on.
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Snapchat co-founders Bobby Murphy (l) and Evan Spiegel (c) ring the opening bell on March 2, 2017, as NYSE President Thomas Farley looks on.

Snapchat's parent reports earnings Thursday afternoon, 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.

Twenty-one analysts are 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 include Chipotle, Under Armour, Foot Locker, Ulta, Coach, Trip Advisor, Viacom and Garmin.

On the other extreme, 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 billion 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 found 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, said 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."