It’s fair to stay that things have not gone as planned for Snap Inc (NYSE:SNAP) in its first few months on Wall Street. After closing above $27 on Mar. 3, SNAP stock has just sputtered downward and is now hugging the $15.50-level.
But at around $15.50, SNAP stock remains richly valued. Meanwhile, Snap’s headwinds are only growing.
Facebook Inc (NASDAQ:FB) continues tp chip away at Snapchat’s moat. Instagram Stories continues to soar in popularity. The first lock-up expiration date is just around the corner.
Overall, there really isn’t anything for bulls to look forward to, but a whole bunch for bears to get excited about.
That is why the short SNAP trade looks a whole lot better than the long one, even at these depressed levels.
Facebook Continues to KILL Snapchat
Before SNAP’s IPO, the story line was that Snapchat was killing Facebook.
Since the IPO, that story line has flipped on its head. Now, Facebook is killing Snap.
In April of 2017, Facebook said that Instagram Stories had 200 million daily users. Facebook launched Instagram Stories in August of 2016. So, in about 8 months, Facebook had created a Snapchat clone that was already more popular and more widely used than SNAP itself.
Two months later, in June of 2017, Facebook said that Instagram Stories had 250 million daily users. Snap reported in May that it had 166 million daily active users. So, in about 10 months, Facebook has turned Instagram Stories from a concept into something that is 50% larger than Snapchat.
Worse yet, it’s not just that Instagram’s growth is far bigger. It’s also that Snap’s growth is becoming far worse. From the beginning of 2014 to the launch of Instagram Stories, SNAP was adding about 11 million new daily actives per quarter. Since the launch of Instagram Stories, Snapchat is adding about 7 million new daily actives per quarter.
And investors can’t attribute that slowdown to scale or the “law of large numbers.” Just look at Instagram Stories. It’s adding 25 million new daily actives per month (about 12.5-times as much as SNAP), and its 50% larger than Snapchat.
No matter how you slice and dice the growth numbers, it’s almost impossible to paint a bullish picture for SNAP stock. Any way you look at it, Instagram is stealing its thunder. That was the case several months ago, that is the case today and it will be the case several months from now.
SNAP Stock Lock-Up Expiration Looms
The scary part for SNAP stock is that all the bearish sentiment regarding how Facebook is killing Snap hasn’t even hit the stock price yet.
That is because more than 80% of the company’s outstanding shares can’t even be sold yet. But a big chunk of those 1.2 billion shares will be become available for sale at the end of July, while the rest will become available for sale at the end of August.
That’s not good for SNAP stock.
For context, other tech companies have fared quite poorly heading into their lock-up expiration dates. According to a report from MKM Partners, Facebook, Twitter Inc (NYSE:TWTR) and LinkedIn each fell an average of 24% in the 30 days prior to their lock-up expiration dates.
Moreover, short interest on SNAP stock is surging into the lock-up expiration, much like it did for FB, TWTR and LNKD.
One can make the argument that a lot of this bearishness has already been priced into SNAP stock. After all, it is already trading in-line with its IPO price after popping 40% in its first day of trading.
But this is a stock that’s still trading at around 10-times next year’s consensus revenue estimate with no clear path to profitability. It’s a company that is facing intense and unrelenting competition from Facebook, struggling to grow its user base, and spending an arm and a leg to fuel growth that might not ever materialize. Sentiment around this name is just too negative to ignore.
Even the bullish underwriters are lowering their estimates and price targets on the stock. Credit Suisse, Morgan Stanley and Cowen have all lowered their price targets on SNAP stock ahead of its lock-up expiration.
For all these reasons, the lock-up expiration at the end of July is a major headwind for the stock.
Bottom Line on SNAP Stock
Snapchat has tumbled below its IPO price after popping more than 40% in its first day of trading. With headwinds piling up and the the first lock-up expiration date looming, SNAP stock will continue to head lower over the next month.
As of this writing, Luke Lango was long FB.
