Snap Inc (NYSE:SNAP) has a lot to prove Wednesday when parent of popular messaging app Snapchat reports first-quarter earnings after the closing bell. SNAP stock closed Tuesday at $23.32. And if you’re a fan of volatility, these shares, which have traded in a range of $18.90 to $29.44, have been a fun ride.
The stock, which soared 44% to high of $29.44 on its first trading day as a public company, has snapped back to reality. I won’t go so far to say “I told you so,” but you were warned. On the bright side, SNAP stock — up about 15% since mid-April — has risen almost 12% in thirty days.
Snap Inc: Too Much Riding on This Quarter
But there are no clear signs that this recent bounce can last. The company’s slowing user growth has become a huge concern. This afternoon, Snapchat, which saw daily active users rise just 3% sequentially in the Q4, must show that it can get users growing again. For the quarter that ended March, analysts expect Snap Inc to lose 21 cents per share on $146 million in revenue.
Since its launch, the Snapchat app has consistently focused on introducing new and unique features, making it widely popular among teenagers. The company claims the app had 158 million daily active users per day at the end of 2016 — majority of which are between 18 and 34 years old.
These totals mark a 48% year-over-year increase. And the fact that the daily users visit spend more than 20 times per day (on an average 30 minutes per visit) could be a boon for marketers. Yet, analysts forecast SNAP to lose money over the next couple of years. This is because, while revenue is rising at a breathtaking rate, so are its costs. Hard to imagine, but even Twitter Inc (NYSE:TWTR) looks like a better investment these days. Never mind the unrealistic comparisons to Facebook Inc (NASDAQ:FB).
Snap Inc, which calls itself a camera company, is working to diversify its revenue stream, which is smart. Snapchat CEO Evan Spiegel, only 26 years old, has visions of Snapchat to one day become a next-generation T.V. platform — one that can rival Netflix, Inc. (NASDAQ:NFLX). But before Wall Street can take any of that seriously, he must prove that he can effectively monetize the core business — something that Facebook CEO Mark Zuckerberg struggled early on to prove.
To that end, investors should expect some choppiness SNAP stock in the near-term, especially as the company’s revenue core ad systems in undertaking continued improvement and being retooled. In the meantime, Snapchat’s lofty valuation, priced at almost 65 times revenue, will limit the upside in the stock. Not to mention, it means SNAP stock can get severely punished on one revenue hiccup. Will it be this quarter?
Bottom Line for SNAP Stock
Aside from being severely overvalued, SNAP stock — which has five analysts Sell ratings — has a consensus price target of $24, which implies less than a 3% potential return for the next 12 months. In other words, where’s the value?
And with user growth stalling, while costs are rising, there’s now just too much risk riding on this quarter and the ones to follow. Snap Inc should be avoided ahead of today’s numbers and if the stock were to fall below $18, then I’ll re-evaluate.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
