Sell Snap Inc (SNAP) Stock Before the Valuation Implodes

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Snap Inc (NYSE:SNAP) debuted on Wall Street with a bang. Snap stock soared 44% in its first day of trading. Then it climbed another 10% the following day to above $27 per share.

Sell Snap Inc (SNAP) Stock Before the Valuation Implodes

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But it has been nothing but downward-biased volatility since then. I have pointed out before that Facebook Inc (NASDAQ:FB) is aggressively and successfully playing the copycat game, and that seems to be weighing on shares of SNAP. Facebook’s latest roll-out, Instagram Direct, has Snap stock once again in a downward spiral.

It isn’t going to better for Snap, and I actually think the worst is yet to come.

How to Look at Snap Inc as a Company

From a multitude of conversations with millennials and Snapchat/Instagram overlap users, I have gathered that Snap Stories and Instagram Stories can coexist given their different purposes. Snap Stories are viewed as more personable and intimate. It’s for the type of stuff you want to send to a close circle of friends, the inside jokes, and the stuff you don’t want mom or dad to see.

Instagram Stories, unlike Snap Stories, are viewed as more public, given the scale of users on the platform. Instagram Stories are for those broadcasts whose intended audience is nearly everyone you know. In other words, you use it when you want everyone to see what you’re doing. It’s for the universally funny material and the type of stuff you’re okay with Mom and Dad seeing (because they are starting to get on Instagram, too).

It is this very distinction that puts a cap on Snap’s total addressable market (TAM). Snap can’t get too big, or else it loses the very intimacy that makes it valuable to its core millennial demographic.

Right now, Snap is the kids table. That makes it cool. But when mom and dad sit at the kids table, it isn’t so cool anymore.

From this standpoint, I like to look at Snap as a trendy camera company with a limited, 18-34-year-old-user focused addressable market.

What That Means for Snap Stock

Unfortunately, that means Snap’s stock looks grossly over-valued here.

As has been pointed out by multiple bears, the user growth story may already be nearing completion. There are about 75 million 18-34-year-olds in the United States. Snap’s daily active user count in North America is 68 million. Realistically, the company is nearing user base maturity domestically.

Internationally, Snap’s growth story is a tougher sell because Facebook, Instagram, Messenger and WhatsApp already have such large international user bases. This is likely why growth in Snap’s international user base is already plateauing. As Facebook continues its global roll-out of Snap-like features, Snap Inc will discover that gaining international users will only be more of an uphill battle.

Without user growth, SNAP stock will rely on average revenue per user (ARPU) growth to drive sales growth. At $1.05 in global ARPU, Snap has a lot room to grow to Facebook’s $4.83 ARPU.

But cracks are even starting to show there. Facebook’s domestic ARPU grew 4 percentage points faster than Snap’s domestic ARPU last quarter despite Facebook’s domestic ARPU being more than nine times as large. How is Facebook growing unit revenue faster than Snap on a much larger base? Likely because top-tier ad dollars are flowing to the Facebook ecosystem and are still wary of Snap’s value proposition.

Bottom Line on SNAP Stock

With a limited user base TAM, alarmingly slow unit revenue growth trends and intensifying competition, there is no way Snap stock deserves a richer forward valuation than Facebook.

But right now, the market is giving it one. Snap stock is trading at 12 times forward sales while Facebook is trading around eight times forward sales. Considering Facebook is actually growing faster on key performance metrics, this disconnect in valuation makes no sense to me.

At this premium of a valuation, Snap stock has nowhere to go but down. Selling now will look like the smart move in 12 months.

As of this writing, Luke Lango was long FB stock.  


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/sell-snap-inc-snap-stock-implodes/.

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