There’s No Good Reason to Buy Snap Inc (SNAP) Stock

While SNAP isn't a smart investment, it could still make a decent trade

Lens Studio Unlikely to Help Snap Inc (SNAP) Stock Where It Counts

Let’s just be real right off the bat: Snap Inc (NYSE:SNAP) is not the best investment. At least, it would appear that way considering the current information that we have. But that doesn’t mean that SNAP stock isn’t worthwhile as a play on the future.

There's No Good Reason to Buy Snap Inc (SNAP) Stock
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For better or worse, the company is almost entirely built around the Snapchat social media platform. Some social media companies are getting their act together, like Twitter Inc (NYSE:TWTR). Others like Facebook Inc (NASDAQ:FB) continue to dominate.

As soon as Snapchat builds momentum, Facebook’s Instagram muscles its way back into users’ hands — blatantly copying a number of Snapchat’s features. But the point is still the same: It has more firepower than even the hottest name in social media.

And that, of course, is the major risk to SNAP stock. Facebook just hit 2 billion monthly active users. Not long ago, Instagram was tallying more than 700 million users — adding the most recent 100 million users faster than the prior 100 million. Clearly, growth isn’t slowing.

For Snapchat’s part, daily active users reached 166 million. While this was up some 36% year-over-year, it’s not all that impressive given Facebook’s position.

For starters, Instagram Stories — just a feature on the platform — already has 250 million DAUs after launching less than a year ago. Additionally, FB grew DAUs 18% YoY to 1.28 billion.

Finally, FB had earnings of $1.04 per share last quarter. Facebook hasn’t missed an earnings estimate in 12 straight quarters, and has topped revenue estimates in 11 of those. SNAP? Well, let’s just say it missed top- and bottom-line estimates in its only quarter, losing $2.31 per share.

At best, investors can hope that Snap Inc will carve out a powerful role in the social media world. It can use augmented reality, fresh content and new filters to continually engage its users. But it will always have FB lurking over it, and that makes for tough sledding.

SNAP Stock Valuation

Estimates call for revenue to nearly double from 2017 to 2018. That’s certainly impressive. But SNAP trades at an absurd 40 times sales. Unless SNAP becomes wildly profitable with fat margins, there’s no way investors should be able to justify paying this type of valuation.

And not to beat the FB drum too loudly, but its worst quarterly sales growth over the past six quarters is north of 49%. Given its size, profitability and honestly decent valuation, why wouldn’t you want that over Snapchat stock? (Here’s the full breakdown on FB stock, by the way).

Wait, I Thought There Was a Buying Opportunity in SNAP?

SNAP stock, Snap, Snapchat
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This isn’t meant to be a slam piece on SNAP. The truth is though, SNAP stock isn’t a reasonable investment.

It’s going against a behemoth, isn’t profitable and doesn’t have the user growth to justify its valuation. But it could be setting up as a good trade.

SNAP stock has a low of $17. Traders who want to take a shot on this stock can keep that level in mind for their stop-loss. As we can see by the purple line, however, SNAP stock has actually made a pretty nice base here.

Additionally, the MACD (orange circle) is showing some bullish momentum. That could give SNAP stock a nice boost, perhaps up to downward resistance (blue line). With its trajectory, that may come into play around $19.

Risk management is certainly the key for SNAP stock. However, investors who believe this company may have what it takes to succeed in the social media world or short-term traders who are looking for a quick buck, this could be their play.

NOTE: Keep in mind that SNAP stock has big lockup expirations coming this summer, starting July 31. Unless firms do some massive buying or insiders choose not to sell, SNAP stock will likely be headed lower.

Again, if it were me entering the space, I would look to stick with the leader in FB. But there is a decent trade presenting itself in the short term for SNAP stock.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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