Snap Inc (SNAP) Stock Can’t Hide Behind Its Earnings

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From a “feel” standpoint, I can see why an investor might want to trade Snap Inc (NYSE:SNAP) ahead of Thursday afternoon’s earnings report. The owner of Snapchat has been pilloried since its March initial public offering, with SNAP stock well below its IPO price of $17 and down 50%-plus from early highs above $29.

Snap Inc (SNAP) Stock Can't Hide Behind Its Earnings

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As such, buying SNAP stock seems like the ultimate contrarian play. Everything looks like it’s going against Snap Inc at the moment.

The lockup on one chunk of SNAP stock already has expired, adding to the market and potentially depressing the share price. Almost 800 million more shares are on their way to the market, which only adds to the pressure.

The narrative surrounding SNAP is almost uniformly negative. CEO Evan Spiegel is taking heat. Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) are copying Snapchat features. Meanwhile, SNAP stock fell 21% after its Q1 earnings, due to the same slowing user growth seen in the fourth quarter of 2016 (as reported in its S-1 filed ahead of its IPO).

Everything is going wrong. And at least from a trading standpoint, that might make SNAP stock attractive. Expectations are low. It’s not hard to imagine news coverage on Friday morning about “relieved” investors bidding SNAP stock up 8% or 12% after Snapchat user growth figures weren’t terrible and commentary on the post-earnings call was reasonably coherent.

But I don’t think that’s going to happen. If anything, Q2 seems likely to keep SNAP stock heading downward — for a number of reasons.

SNAP Already Is a Contrarian Play

While I’ve been sympathetic to Spiegel and Snapchat, arguing that the problem with SNAP stock is more expectations than execution, I’ve still argued that the valuation of SNAP stock is far too high.

But, to be honest, along the way, I’ve figured that at some point SNAP stock would eventually stabilize — if only for a while. The old trading saws about “not shorting on valuation” and that “growth stocks climb on a wall of worry” at some point would seem to apply to SNAP. At the least, a short of SNAP stock seemed just too easy; and “easy” shorts usually are the most dangerous ones.

So I can see why trading SNAP around earnings might be intriguing. But that trade still requires that the market suddenly start treating SNAP stock like other growth issues. And whether the problem is real issues at Snapchat, a dislike of the stock or the powerful rivals in the space, I’m skeptical that change is going to happen on Thursday.

SNAP Stock Is Still Ridiculously Expensive

The other issue is that even at $13, SNAP stock isn’t cheap. I’ve pointed out in the past that per-user numbers don’t make the valuation here quite as insane as a 12X revenue multiple would imply. But SNAP investors still are paying dearly for profits that won’t come until next decade – if they come at all.

Even ignoring the potential impact of lockup expirations — which could lead to a reversal of any post-earnings gains, as insiders sell into strength — there’s not some base of value investors looking to charge into SNAP at $10 or $11.

It’s true that Snapchat is posting solid user growth, and the company is still learning how to monetize those Snapchat users. Revenue increased 286% year-over-year in the first quarter after all.

But the problem for SNAP stock from a fundamental standpoint is competition. It’s not just that the giants are copying Snapchat. Snap Inc has to take online advertising spend from Facebook and Google, let alone Twitter Inc (NYSE:TWTR).

That’s a tough ask. And it means the “ramp” of Snapchat revenue isn’t as clear as it is for many other high-growth companies. Shopify Inc (US) (NYSE:SHOP) trades at about 15X revenue, for instance. But it’s on a clear path to dominate its industry. There’s no way the same is true for Snapchat with Facebook and Google in the way.

That’s a problem from a long-term standpoint and a short-term standpoint. Because I simply don’t believe there are investors on the sidelines waiting for the “right price” to buy SNAP stock.

A Lack of Trust In Snapchat

The biggest reason to keep expectations low for Snap Inc earnings is that the problems here aren’t getting fixed in a quarter. Investors simply do not trust Snapchat at this point, for a variety of reasons.

CEO Spiegel is looking less like Mark Zuckerberg every day. There’s a very real risk that Facebook and Google can simply squash Snapchat. And unlike Twitter, in particular, Snapchat doesn’t count a lot of investors in its demographics.

Again, there’s probably a contrarian case here. But there are real reasons for why SNAP stock has declined pretty much since its second day on the public markets. And there’s not enough reason to think that decline is going to stop on Thursday afternoon.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/earnings-save-snapchat-snap-inc-nyse-snap-stock/.

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