I still think the biggest problem with Snap Inc (NYSE:SNAP) stock is investor expectations. From the coverage of SNAP stock since its IPO, one would think that Snapchat users were collapsing and its prospects forever doomed.
The fact is that Snap Inc went public as an early-stage social media platform with solid, albeit decelerating, user growth. It was still learning how to monetize those users. It had almost no international revenue, and still doesn’t (just $26 million in international revenue in Q1).
Now, SNAP is criticized as this wildly overpriced, over-hyped issue because the market initially valued the company at roughly $20 billion. That certainly seems too high, and the current price of SNAP shares remains too high. But, the reasons for that overvaluation shouldn’t surprise investors. For better or worse, the story of SNAP stock and Snapchat hasn’t really changed much since the IPO in March.
So, with SNAP stock bouncing off an all-time low and currently trading around $15, I think there’s a potential opportunity coming, at some point. Snap Inc has a likely eventful month ahead, which could make big moves for the stock. And, if there’s another leg down for SNAP, aggressive investors might want to think about taking a flyer here.
A Busy Month for SNAP Stock
Most notably, the first lockup expiration for SNAP stock occurs on July 31, with the full float following in late August. That date has been targeted by short sellers, in particular, who expect an exodus out of SNAP by insiders, which will push the share price down.
At this point, however, it’s hard to wonder if the market isn’t going to “sell the rumor and buy the news,” to reverse the old adage. The lockup expiration has become such a part of the SNAP story that it very well may be priced in. There could be a number of potential SNAP stock buyers hoping for a lockup-driven decline to buy shares at a lower price.
Meanwhile, Snap Inc also reports Q2 earnings on August 10 after the first lockup expiration, but before the second. Investors will be focused on both Snapchat user growth and advertising revenue.
All told, the next 6-7 weeks should be eventful ones for SNAP stock. Traders should watch closely for the type of volatility needed to make quick profits. But, long-term investors with the stomach for that volatility might also watch to see if an appropriate entry point presents itself.
Snapchat Is Still Growing
There are real concerns surrounding SNAP stock, to be sure. The valuation — in the ballpark of 30x revenue on an enterprise basis — still looks to be at nose-bleed levels. Snapchat user growth slowed both in Q4 2016 and in Q1 2017. The company is struggling with advertisers, while Facebook Inc (NASDAQ:FB) continues to target the Snapchat platform by copying many of its features.
The longer-term question is whether those concerns can be answered. Again, this is an early-stage company. Snapchat itself is not even six years old. It has plenty of growth ahead, assuming it can hold off the Facebook threat and expand its user base both demographically and internationally.
The valuation concerns somewhat ignore that potential. 30x revenue might sound absurd, but given that sales are expected to double next year, that multiple will come down over time. And, Snapchat can drive revenue growth simply by harvesting the users it already has.
On a per-user basis, SNAP stock isn’t nearly as expensive as one might think, as I argued in May. At the moment, SNAP is valued at about $100 per daily active user. That figure is higher than that of Twitter Inc (NYSE:TWTR). Of course, Snap’s growth prospects and profitability potential look much stronger than Twitter’s at the moment. And, SNAP’s per-user valuation is now in line with that of Zynga Inc (NASDAQ:ZNGA), a social gaming company whose post-IPO performance was almost as bad as that of Snap Inc.
The problem with SNAP stock is less with Snapchat than with what investors expected. (The endless media hype didn’t help, either.) This isn’t a dying company, nor is it one that will be unprofitable forever.
What’s SNAP Stock Worth?
The problem, even at $15, is that I’m not sure Snapchat’s promise supports SNAP stock. It isn’t a short anymore, particularly with borrow rates at 50%-60%, but it still looks a touch overpriced. ZNGA looks overvalued as well, and so does Twitter. SNAP could have a per-user valuation in line with those stocks, yet still decline further.
Meanwhile, the potential of Snapchat still relies on execution by Snap Inc, and the company has a lot to prove on that front. It needs to prove to advertisers that it is a viable alternative to Facebook and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) property Google. It needs to establish a foothold overseas. Those efforts won’t be easy or quick.
But, there is a scenario here where the next few months could allow for a high-risk entry into SNAP stock. A Q2 report that shows operational improvements and a lower price (I’m targeting $12-$13) from lockup expirations and/or short selling could make SNAP interesting. That combination might be a lot to ask, but it’s not impossible, either.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
