The headline may sound harsh, but sometimes the truth hurts. Investors can justify buying Twitter Inc (NYSE:TWTR) and Facebook Inc (NASDAQ:FB). However, there’s just no reason to buy Snap Inc. (NYSE:SNAP) at current levels.
I’ve already explained why Twitter was in a solid position to be bought. Facebook has been a pounding-the-table buy for as long as I’ve been writing at InvestorPlace. But SNAP is one stock I’ve never warmed up to.
The Front Office
Snap management hasn’t had the easiest entrance into the public markets. Shortly after going public, CEO Evan Spiegel took a salary of just $1. It’s obviously less admirable when considering he got an $800 million bonus. Since then, a wedding and a “bro trip” have made headlines. And, hey, if I was the world’s youngest billionaire, I’d probably feel a bit entitled too. Who wouldn’t want a break after all the hustle?
I’m not saying it’s wrong, but it’s frustrating from a shareholder’s perspective when SNAP stock is being decimated. It feels like Spiegel & company were able to go public (allowing them to sell stock post-lockup) and collect a near-$1 billion bonus, leaving the shareholders holding the bag. It may not have felt that way if Snap had not missed earnings and revenue estimates in both of its quarterly reports so far this year — or if Facebook’s Instagram Stories wasn’t making mincemeat out of Snapchat.
Mark Zuckerberg can wear whatever hoodie he wants to meetings now that FB stock’s up 635% over the past five years.
Do What You Do Best
One of the biggest things to me, though, was when Snapchat went to Snap Inc. The company is branching out of its comfort zone — this can be good — but it has ventured into the dangerous world of hardware. The company launched Spectacles, its camera glasses, last year.
While I don’t wholeheartedly disagree with Snap’s ambitions, they’re hard to back. With the exception of Apple Inc. (NASDAQ:AAPL), hardware is a very difficult industry to be profitable in. Look at a company like GoPro Inc (NASDAQ:GPRO). It makes excellent, industry-leading action cameras. It was profitable until fiscal 2016. Yet, shares are down 83% since the start of 2015.
Snap has reportedly made acquisitions in the drone industry and Spiegel has talked about how important the camera is these days, how it’s “evolved from just a piece of hardware, like a chip, to a software connected to the internet.”
And, no, Snap wouldn’t be the first software company to venture into the hardware world. Facebook works with drones and VR headsets. Amazon.com, Inc. (NASDAQ:AMZN) has found success with Alexa and Kindle readers. Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) makes the Pixel smartphone.
But do you know what Snap isn’t, especially compared to the juggernauts above? It’s not profitable and not worth, at a minimum, $450 billion.
A company doesn’t need to be profitable in order for its stock to go higher. But from a shareholder’s perspective, seeing strong user growth, an insatiable platform and, heck, at least revenue growth that can top expectations would be nice. Why not figure out a way to beat Facebook and Instagram before we start worrying about drones?
Final Look at Snap Stock
Click to Enlarge
I cringe thinking about Snap’s upcoming earnings report in November. If the company disappoints again, SNAP stock is in for a hammering. Each miss on user growth and revenue makes investors feel like Snap is falling further and further behind Instagram.
Revenue is impressive, as analysts expect 81% growth in 2018. But the bleeding is real. Last quarter, net income came in at -$443 million, notable for a company valued at around $16 billion . In the last two quarters, net income sits around -$2.6 billion. As expected, operating cash flow is also a turnoff, at -$365 million over the past six months.
I keep feeling that the mentality at Snap is: Now we’re public — we can treat ourselves and experiment with new ideas. Whereas, it should be: We have a whole new group of investors we need to appease and satisfy.
The fact that Snap didn’t allow for voting rights furthers this notion; and SNAP stock should have debuted at a discount because of this, not a premium.
For now, SNAP stock is keeping its head above the $13 level. I just don’t see what’s worth investing in. FB is gunning for Snap and management doesn’t seem to have a solution for it. And should SNAP stock lose its lows around $11.30, there’s no telling how far it could fall.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in TWTR.
