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Before You Dismiss Snap Inc (SNAP) Stock, Remember Facebook Inc (FB)

Snap stock - Before You Dismiss Snap Inc (SNAP) Stock, Remember Facebook Inc (FB)

Source: Shutterstock

Admittedly, Snap Inc (NYSE:SNAP) stock hasn’t had a great start to its life as a public company. From a business standpoint, nothing has actually happened yet. There’s been no earnings news so far: First-quarter results for Snap stock likely will be reported in late April or early May. The company did add a “search” feature to Snapchat, but that’s not big news relative to the $27 billion valuation currently assigned to SNAP.

Before You Dismiss Snap Inc (SNAP) Stock, Remember Facebook Inc (FB)

Source: Shutterstock

But the narrative surrounding Snap stock has been persistently and consistently negative. Analyst downgrades met the stock almost immediately, leading SNAP to tumble after early post-IPO gains.

Complaints about the lack of voting rights afforded Snap stock holders have led to calls that the company’s own IPO was the sign of a bubble in the broad market.

Then when analysts from firms that underwrote the SNAP IPO, including Goldman Sachs and Morgan Stanley, giving Buy-equivalent ratings to the stock, there were the predictable howls that major investment firms were unfairly supporting the stock price. Little over a month after the SNAP IPO, it seems downright contrarian — if not unethical — to issue positive commentary on Snap stock.

I certainly understand some of the skepticism; with Snap stock trading at ~60x revenue, valuation risk is obvious.

FB Opened Much, Much Worse Than SNAP

But investors jumping on the “bash Snap” bandwagon, or thinking SNAP is a slam-dunk short, should bear in mind the early trading of social media giant Facebook Inc (NASDAQ:FB):

“Facebook Inc shares slid below $29 to a new low on Tuesday as nervous investors fled the company’s shares, concerned about the social network’s long-term business prospects and an initial offering price that proved too rich …Wall Street has harbored concerns that Facebook, while boasting nearly a billion users worldwide and dominating Internet social-networking, would have difficulty translating its growing presence on smartphones and other mobile devices into revenue.”

That quote comes from a Reuters article written May 29, 2012 — just eleven days after the FB IPO. The IPO itself was a mess, too, and widely referred to as something close to a disaster. Indeed, Nasdaq Inc (NASDAQ:NDAQ) was fined $10 million for system failures during FB’s first day of trading.

It only got worse from there. By September, FB traded below $18, down more than 50% from its IPO price. And it’s difficult not to hear echoes of the Snap IPO in Facebook’s own coverage at the time. An “initial offering price that proved too rich”. Snap stock’s lack of voting rights compares to the disclosure that FB CEO Mark Zuckerberg would control the company even when he died.

And FB stock in its first six months of trading had the same feel Snap stock does now. It was “muppet bait“: a stock that would burn retail investors. The valuation was crazy. There were even calls that the Facebook IPO was the sign of a “new tech bubble” — the same as those made now. Of course, FB investors now are singing a very different tune.

Facebook Growth Doesn’t Make Snap Stock a Buy

That’s not to say, at all, that SNAP is a buy simply because Facebook stock is up ~700% from those all-time lows in September 2012. Snap stock is expensive and a long way from profitability, as my colleague James Brumley has pointed out.

But there are two lessons investors interested in SNAP should glean from Facebook’s first few months as a public company. The first is that it might be OK to show some patience. Early post-IPO trading is volatile; it’s better suited to equity and options traders, not investors. The market is still figuring out fair value for Snap stock, and that takes some time, and a lot of arguments. Lock-up expirations, which allow pre-IPO investors to cash out at designated times, still loom, and could further pressure SNAP.

The second lesson, however, is to tune out the noise. The armchair analysts questioning the valuation of Facebook stock, or claiming some sort of bubble, were flat wrong. There was no tech bubble; not only has FB stock soared, but the NASDAQ 100 has better than doubled. Investors who listened to dire, media-baiting, predictions missed out on a lot of value — and not just that created by Facebook stock.

Give Snap Stock A Chance

Snap stock might turn out to be a worthwhile investment. It might not. Either way, it is not a sign of the financial apocalypse. The lack of voting rights only makes official what investors in Facebook and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) already have through their permanent minority voting rights: No control.

There’s little effective difference between Snap stock and Alphabet stock from a governance standpoint. (The same is true among the classes of Under Armour Inc (NYSE:UAA, NYSE:UA) stock, which presents an intriguing arbitrage opportunity.)

And yes, Snap stock is expensive, but expensive stocks can stay expensive for a very long time — or grow into their valuations. Just look at Amazon.com, Inc. (NASDAQ:AMZN). The next time you hear a snap judgment (pun intended) short case for SNAP, remember what the Washington Post wrote about the Google IPO in 2004:

“This price is insane. And anyone buying Google as a long-term investment at $109.40 will lose money … This has nothing to do with Google as a company … It has to do with math and with limiting factors — fancy language for the old truism that no trees grow to the sky.”

Those voices are always out there. Don’t listen to them alone. Do your own research, and give Snap stock a chance.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/snap-inc-snap-stock-remember-facebook-inc-fb/.

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