Snap Inc (NYSE:SNAP) finally started trading on the NYSE on March 3, becoming one of the biggest initial public offerings in recent memory. That said, you can find a better investment in market whipping boy Twitter Inc (NYSE:TWTR).
SNAP stock shot up 44% in its first trading day, and headed even higher during its second. But then reality set in, and the stock started heading lower. At its peak, SNAP sat at $29.44. It sits at $21.50, currently.
There’s still a lot to like about Snapchat. The social network is still incredibly popular with teens, barely scratched its monetization potential and it doesn’t seem to have any of the problems that plague Twitter, one of its biggest competitors. But SNAP stock has some major disadvantages, too. Here are three reasons why I prefer TWTR stock to Snapchat.
I’m the first to admit most tech stocks are not a good value, at least when compared to the rest of the market. But Snap Inc is incredibly overvalued.
Yahoo! Finance lists SNAP stock as having a market capitalization of $26.1 billion. In 2016, the company did $404 million in revenue and lost a total of $515 million, or 51 cents per share. The red ink is expected to improve in 2017 and 2018, but analysts are still expecting Snap to lose 42 cents and 27 cents per share in the next two years, respectively.
Compare that to Twitter. TWTR stock also lost money in 2016 — to the tune of $457 million — but things are projected to get better in a hurry. TWTR stock is projected to earn 29 cents per share in 2017 and 39 cents in 2018. In addition, Twitter earned 60 cents per share in free cash flow in 2016.
TWTR stock is no bargain today, trading at 52 times forward earnings estimates. But it’s a great value compared to SNAP stock. And remember, Twitter is down 64% since its 2013 IPO, which further adds to its perception as a value stock.
One of the most interesting things about Twitter is the love-hate relationship some of its power users have with the service.
Most active users have a myriad of ideas on how to fix the micro blogging service. Suggestions include being able to edit tweets, getting rid of anonymous troll accounts, and giving users easy options to use more than 140 characters.
Other improvements that people have suggested on the corporate side are to cut spending, improve the ad targeting software, and hire a full-time CEO. Remember, Twitter CEO Jack Dorsey also runs Square Inc (NYSE:SQ), a payment processing company.
Eventually, Twitter will get serious about fixing its problems. When it does, it’s easy to envision TWTR stock going much higher.
Last summer, in the worst-kept secret of the tech world, Twitter put itself up for sale. It originally attracted strong interest, with most of the sector’s prominent players taking at least a cursory look.
One by one, the suitors dropped out. Although nobody said anything publicly, it was reported most dropped out because of Twitter’s reputation. It just can’t get past its troll problem.
It has made some changes since then, which includes hiding potentially nasty tweets and taking steps that will make it harder for banned users to easily create new accounts. More changes are likely coming. If the company can be successful minimizing its troll problem, a subsequent sale process will likely end up culminating in a deal.
Twitter really proved its worth during the 2016 Presidential Election. Both Donald Trump and Hillary Clinton used the service extensively, but Trump was able to leverage it to his advantage much more than Clinton was. Trump continues to use Twitter as a tool to communicate directly with voters.
Bottom Line on TWTR and Snap Stock
It’s no surprise Snap stock is down so much versus its post-IPO highs. The company has a number of issues, including a high valuation, more predicted red ink, and concerns it might be a flavor of the month.
Twitter has its own problems, but TWTR stock is beaten-up enough that it could make a compelling buy here. And if the company can improve its product, a buyout offer could emerge.