Snap Inc (SNAP) Stock: Some Good News, And Some Bad News

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There’s part of me that feels a bit bad for Snap Inc (NYSE:SNAP) CEO Evan Spiegel. Since its March IPO, SNAP stock has been one of the most-covered — and most-criticized — issues in the market. The complaints seem endless. Snapchat user growth is too slow. It’s not the next Facebook Inc (NASDAQ:FB). Snap Inc is losing money.

Snap Inc (SNAP) Stock: Some Good News, And Some Bad News

Source: Snap

All those things are true, to be sure. But, none of them should be a surprise. Nor does the blame lay solely at Spiegel’s feet, either.

It’s not the CEO’s fault that the market was willing to value an early-stage social media company at $25 billion. And, it’s not the sign of some sort of catastrophic change in the business that, at three-plus months after its IPO, SNAP stock has returned to its $17 IPO price.

To be clear, I don’t think SNAP stock is a buy, even at the IPO price. But, the sentiment surrounding Snap Inc looks too negative — and the short case sounds too easy. Going forward, it’s worth keeping in mind that many of the negative facts cited to justify a short of SNAP stock, or its sign as the peak of some sort of new tech bubble, might not be as negative as investors think. Much of the “bad news” being priced into SNAP stock could actually be good news — at some point.

Marketers Aren’t Using Snapchat

A recent social media survey showed that just 7% of marketers are using Snapchat. That compares to 94% for Facebook, 68% for Twitter Inc (NYSE:TWTR), 56% for Microsoft Corporation’s (NASDAQ:MSFT) LinkedIn, and 45% for Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube.

Is that a problem for Snap Inc? Or is that an opportunity? Again, the figure shouldn’t necessarily be a surprise. Snapchat only now is monetizing users. The platform itself is less than six years old.

But, how an investor sees that number likely informs his or her sentiment toward SNAP stock. A 7% reach seems to imply that Snapchat simply isn’t that useful to marketers. Yet, its younger-skewing (and thus highly-coveted) demographic should be intensely attractive to those marketers. And, in some senses, Snapchat simply hasn’t figured out how to market itself. Bear in mind that when Facebook stock plunged not long after its IPO, one key risk cited was the company’s seeming inability to make any money on mobile.

Snapchat may have some tricks up its sleeve, however. A recent deal with McDonald’s Corporation (NYSE:MCD) seems an innovative, and potentially lucrative, revenue stream. And, if Snapchat can get that penetration from 7% up near YouTube, let alone Facebook, its ad revenue should rise exponentially.

That’s a big “if,” to be sure. But, dismissing SNAP stock based on current reach ignores the potential impact of market share gains. It seems far too early to do so.

Snap Inc Is Losing Money

Again, this is no surprise. Nor should Snapchat necessarily be making a profit at this point. This remains an early-stage business focused on user growth and retention. Adjusting costs simply to reach breakeven, or better, in 2017 or 2018 (at the cost of future growth) would be short-sighted.

But, there’s room for this to change quickly as well. Marketing penetration is just a small way in which Snapchat ARPU (average revenue per user) can jump quickly. The company has basically no overseas revenue. It’s still learning the best way to monetize users. The fact that it isn’t doing so now is cited by SNAP stock bears as a sign the stock is overvalued.

That may be true, but it also means that Snap Inc has an easy path toward impressive revenue growth. As disappointing as Q1 earnings were to the market, Snap Inc still grew revenue 286%. It will need years of similarly explosive growth to justify even the current valuation of SNAP stock, to be sure.

But, the fact that Snapchat isn’t making all that much now on a per-user basis — roughly one-ninth that of Facebook — means future initiatives have the opportunity to drive substantial growth. Again, some level of patience is warranted.

SNAP Stock Lockup Expirations Will Hammer the Stock Price

We’ll see. At this point, the lockup expirations have been so widely-discussed that expecting further pressure may be counter-intuitive. Facebook stock rose when its lockup ended, in part because FB bears had highlighted the date so aggressively that bulls were waiting for the expiration to jump in.

I’m not saying that’s the case with SNAP stock at all. Indeed, SNAP stock looks a bit overvalued to my eye, even at $17.

But, it’s way too early to ring the death knell for Snapchat as a business. The story here still has a long way to play out. Investors would be wise to give Spiegel and his company a little breathing room.

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

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/snap-inc-snap-stock-good-news-bad-news/.

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