Expectations are low as Snap Inc (NYSE:SNAP) lurches toward next week’s earnings report — its second since going public at $17 just four months ago, back when the big firms stood behind this upstart messaging platform and its story.
Forget about profit here for years to come. At best, we’re looking for this $15 billion stock to book $190 million in revenue, which tells you everything you need to know about the amount of buzz baked into this stage of the company’s evolution.
SNAP lives and dies on the buzz. That means next week is all about optics, feeding the “wow” factor while soothing fears that an aggressive competitor like Facebook Inc (NASDAQ:FB) can reach over at any time and eat SNAP for lunch.
As long as CEO Evan Spiegel can hit both emotional marks, it doesn’t really matter where the numbers shake out. The multiples are already stretched. Sustain the right mood and they can stretch out even further even if monetization in the here and now remains elusive.
But Spiegel has to roll out the map toward big revenue. Calling SNAP a “camera company” doesn’t do it because it doesn’t actually sell cameras. The Snapchat platform gives young people a place to share pictures and talk to each other, and then advertisers buy access to that audience. In theory, all those high-profile media deals SNAP has been signing will play a role here: as Snapchat becomes a window on destination programming, higher-quality ad inventory will scale to levels that bring in real money.
Of course, for that to happen Spiegel needs to drop the camera company conceit once and for all. That’s amateur hour stuff from Judy Garland movies a half century before he was born. Wall Street likes SNAP as a media company, a Netflix, Inc. (NASDAQ:NFLX) optimized for the smartphone generation if you will. If Spiegel sticks to that story next week, he might earn a little applause.
And he needs to address questions around what would happen to SNAP if a rival like FB — which owns Instagram — gets serious about monetizing photo streams first. I think the risk here is overstated, but stocks that run on extreme moods tend to cycle between euphoria and existential dread. The more Spiegel can steer sentiment away from the gloom, the farther the bulls can run the chart between mood swings.
Wall Street had a lot of hope riding SNAP. Spiegel’s job now is to keep that hope alive by making a compelling case that while gratification will be delayed, it will still be sweet when (and not if) it arrives.
In other words, he needs to treat his shareholders like venture capitalists taking a chance on a long-term story. In that scenario, next week’s conference call may look more like a pitch meeting than a traditional roll through the metrics — the more dazzle, the better.
Otherwise, strip out the sizzle and it’s probably early for most investors to even consider shelling out for the steak SNAP has on the table. Consensus on Wall Street still indicates that these shares might be worth $19.50 one day, but earnings are really going to have to work hard to push the needle beyond that level.
Earnings-driven investors will probably need to hang on through 2020 at the earliest to see the company break even, and even then, the models say SNAP will need to trade above 20X earnings to support a price of $20 per share.
Granted, buying at $13 and holding to $20 opens up a theoretical 50% return, but here in 2017, capturing that cash means riding the SNAP rollercoaster for another four to five years before the numbers even have a chance to justify the bull case.
Historically, a vanilla bet on the S&P 500 would deliver roughly that return with a lot less risk. We’re going to need a lot of buzz.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
