Two weeks ago, Facebook Inc (NASDAQ:FB) blew through analyst estimates with its Q1 2017 earnings. However, FB stock barely moved and continues to trade around $150, within 5% of its all-time high.
Meanwhile, Snap Inc (NYSE:SNAP) soiled the bedsheets last week when it reported its first quarterly earnings as a public company; SNAP stock lost 17.5% in the week and now trades within a couple of dollars of its IPO pricing.
I’m by no means an expert on paired trading, but FB/SNAP would appear to be setting up for the perfect long/short play. Here’s why.
FB Stock Looks Unstoppable
Last March, when SNAP was seeking to go public, I made the case that investors considering its IPO take a pass and buy FB stock instead for the simple reason that Facebook is a cash flow machine, while SNAP is struggling to find profitability.
At the time, although I didn’t know it, I was making a case for a long/short play. Now that Snap has delivered less-than-stellar earnings, and Facebook has done the opposite, it would seem the argument is still on the table.
Back in February, when FB stock was trading around $134, InvestorPlace contributor Richard Saintvilus argued that it would hit $160 within the next 12 months considering the company’s plans to dominate video. Since then, FB stock is up 12.6% through May 12, and within 6% of Saintvilus’s 12-month price target.
“With the company now approaching 2 billion users, when combined with assets such as Instagram and WhatsApp, that translates to massive advertising network poised to generate billions in predictable revenue growth for Facebook. And to say nothing about the company’s ability to expand internationally,” wrote Saintvilus on April 5.
Those are some pretty good reasons to go long FB stock.
In early May, I picked Apple Inc. (NASDAQ:AAPL) over Facebook stock because I see iPhones as a necessity, while Facebook’s services aren’t. That said, I think Apple and Facebook are two of four tech stocks worth owning — the other two being Amazon.com, Inc. (NASDAQ:AMZN) and Alibaba Group Holding Ltd (NYSE:BABA).
You can’t go wrong with the FAAA stocks. Any of these four stocks would be a solid long play in a paired trade with Snap.
More Pain Ahead for SNAP?
Investors weren’t surprised by Snap’s $2.2 billion Q1 2017 net loss, much of which was from stock-based compensation. Its adjusted EBITDA loss, which excludes stock-based compensation, increased by 102% to $188.2 million on $149.6 million in revenue.
The bigger problem was its user numbers.
Its daily active users (DAUs) increased 36.1% year over year to 166 million. That’s the good news. The bad news is that analysts were expecting at least 173 million in the quarter. That’s a significant shortfall, given the quarterly increase in DAUs was smaller than the growth in the fourth quarter, which was less than the quarter before that.
SNAP also had a 14.3% decrease in average revenue per user to 90 cents from $1.05 in Q4 2016, a sign that management is not doing a great job generating revenue from the company’s existing user base. Any future growth in overall users and revenue won’t have nearly as big an impact on SNAP stock, especially if losses continue to pile up.
Bottom Line on FB Stock
I don’t short stocks. However, if I did, SNAP would be at the top of my list.
Currently, SNAP has an enterprise value that’s 10.7 times its 2018 revenue. Meanwhile, Facebook, whose Q1 2017 operating profit was $3.3 billion, or 22 times Snap’s first-quarter revenue, has an enterprise value 7.8 times its 2018 revenue.
There’s no question which is the better company and stock.
Some feel SNAP has bottomed out. However, if you think its first-quarter results are just the beginning of a downward spiral, a FB/SNAP long/short pair seems like a natural.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
