Wall Street has been waiting years for Snap Inc (NYSE:SNAP) to hit the market and give investors a taste of its innovative messaging platform, Snapchat. Now that SNAP stock is finally on board, there’s still money to be made here — if we can score the right entry. And at this stage in the company’s lifecycle, that’s more a matter of patience than speed.
Let’s take a look at the fundamentals first.
Buying SNAP Stock Is All About Price
The Snapchat IPO priced at multiples that most well-established stocks on the market will never even contemplate. To engineer the $17 starting point in SNAP stock, the underwriters had to assume that investors would find enough motivation to buy in at 50 times trailing revenue — forget about profit here before 2020 at the earliest! — which made the stock more expensive than 99% of its large-cap counterparts from the very first trade.
Naturally, the post-IPO action has inflated the multiples even further. Depending on the tick, SNAP has traded as high as 86X trailing sales, which you’d need to chase fairly deep into the small and speculative end of the market to match anywhere else.
Those stocks are rich because they still have nearly all of their growth ahead of them. I believe SNAP does, too, but even if the top line booms 150% to around $1 billion this year and doubles in 2018, that’s still not infinite speed or a sure thing.
It’s also not necessarily a bad thing: rival Facebook Inc (NASDAQ:FB) carries one-third the sales multiple as SNAP at $17, but it’s still also growing one-third as fast at this stage, so the comparisons aren’t too far out of line.
The closer SNAP gets to its opening price, the more compelling the math becomes.
Bottom Line on Snap Inc
While Wall Street was admittedly starved for sizzling tech offerings lately, we’ve already tested the statistical ceiling of how recent IPOs have performed across their first calendar year of public trading. That makes me think it’s going to take proof of real progress toward profitability to take Snapchat stock over the second-day top of $29.44 — which takes the pressure off us to fill our plates now or miss our shot at this stock forever.
Down closer to $23, the chart is full of both implied profit and the heavy lifting the Street will need to unlock that upside. And if you really want to get the messaging app on your trading screen, there’s no real urgency even at these levels.
I suggest giving SNAP stock another few days to cook and then check to see if you can grab it at $20 or even closer to its IPO price to make sure you’re not overpaying.
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.