Sometimes you have to wonder if analysts actually read some of the stuff they write. Granted, handicapping stocks isn’t an easy thing to do. On the other hand, sometimes they don’t help themselves.
The latest eyebrow-raiser: Baird analyst Brian White recently commented on Snapchat parent Snap Inc (NYSE:SNAP) that it’s a “very unique tech company that should not be pigeonholed in a particular industry,” and the fact that Snap sees itself as a camera company “fosters a mindset for innovation.”
Um … what?
OK, there’s a modicum of sanity to it. Snapchat isn’t conventional as long as you disregard the messenger app from Facebook Inc (NASDAQ:FB) and ignore WhatsApp and WeChat, and by avoiding classifying itself as a messenger service it can theoretically do whatever it wants to in the future.
Calling a spade a spade, though, White’s comments sound like a Hail Mary from a quarterback that knows his team is losing the game — a string of buzzwords and sage-sounding wisdom just might be enough to distract investors from just what a dog this stock is.
Yesterday’s and today’s weakness, however, says SNAP traders aren’t buying into the bullishness.
What’s Snap Inc?
Snap, on the off-chance you’re not familiar, is the parent company of popular online messaging app Snapchat. The company went public on March 2, with an enormous amount of fanfare.
The app is a bit of a curiosity, in that the messages — video, text or pictures — disappear after a few seconds.
It sounds odd and even a little pointless, but teens, tweens and most millennials love it. That’s why advertisers love it too — it attracts an otherwise-tough-to-reach millennial crowd.
Like any other web-based platform, Snap is forever improving its technology, making Snapchat even stickier. Problem: Facebook is copying those added features every step of the way. Just yesterday the social networking giant unveiled new camera effects and ‘Stories’ for its messaging app, copying some of the exact upgrades Snap had recently put in place.
The copycatting has been nagging Snap since the onset. Yet, that’s the least of the company’s problems.
Crunch the Numbers
Baird’s Brian White wasn’t the only analyst to recently post bullish thoughts on Snap. On Monday, eight — count ’em, eight — research outfits gave the company optimistic ratings.
Oh, by the way … all eight of those investment banks were also involved in the IPO, including Morgan Stanley and Goldman Sachs.
It is a self-serving stance, albeit indirectly. Other companies looking to go public will not only consider the success of the public offering Snap saw, but the post-IPO support as well. It makes it easier for those banks to win future underwriting business, even though none of them can officially acknowledge such a connection.
What all of those bullish banks seem to be ignoring, however, are the underlying fundamentals.
You own a stock not for where it is, but where it’s going. Most investors essentially understand Snapchat is a long-term growth game, but the bulk of any gains the stock dishes out will be made before the company gets to the proverbial promised land.
Snap, however, is miles and miles away from any semblance of profitability. And in light of the massive disappointment Twitter Inc (NYSE:TWTR) has become despite similar optimism surrounding TWTR just a few years back, one would expect the analyst community to be a little more realistic.
To get to a reasonable (and this is being generous) price/sales ratio of 3.0, revenue would need to grow to roughly $7 billion per year. And, to justify that $20 billion market cap based on earnings, the company would need to swing from a loss of $514 million to net income of $1 billion … at least.
Anything’s possible, in time. In this particular case though, the current growth pace is nowhere quick enough to get the company to those levels anytime soon. It would take years to reach those levels, if they ever do.
Oh yeah… the user growth rate is already slowing down. Snapchat’s user growth rate slumped 82% after rival Instagram unveiled its ‘Stories’ feature.
Bottom Line for SNAP Stock
The company can call itself whatever it wants, and analysts can drink that Kool-Aid all they want. Semantics and premises don’t pay the bills, though.
Soon, Snapchat is going to have to prove its worth with fiscal results. Yesterday’s peelback from the post-upgrades high followed by today’s weakness says the market isn’t buying into the rhetoric.
The market’s usually right, too.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.