Snap Inc (NYSE:SNAP) makes no sense as an investment. There are no earnings. Revenue for its most recent quarter was $181 million yet its market cap is $18.3 billion? SNAP stock is being sold as the second coming of Facebook Inc (NASDAQ:FB).
Its CEO is even younger, at 27. The problem is, we already have Facebook.
Facebook’s ad tools are so good they’re blamed for swinging the 2016 election. SNAP is building its tools from scratch. Facebook has built a network of cloud data centers that make it independent of other companies. Snap is renting.
Snap does not even call itself a social network. It’s a camera company. So it’s not a competitor to Facebook, can’t really compete with Facebook and it can’t be independent of anyone. Yet we’re supposed to pay $18 billion for it?
Yes, there are 10 analysts who say buy it. But there were 11 a month ago, and 12 two months before that. SNAP stock is a fever that is slowly running its course.
What’s the Appeal to SNAP Stock?
But this doesn’t mean you can’t make money with Snapchat. You can make money with Bitcoin, after all.
You make money with SNAP through options, betting on the fevers of other traders. Our Joseph Hargett recently explained how this works. You can work a call spread, betting on a technical rally. You can buy a put spread, betting on the fundamentals driving the price lower.
You can place these bets because Snap does not report earnings again until Nov. 9. Analysts are expecting a 31 per share loss, slightly less than the 36 per share loss of the June quarter. The June loss came to $443 million, so expect a September loss of about $400 million.
All this winning through losing is possible because SNAP has nearly $2.8 billion of cash and short-term investments on its books. It has this money because of its IPO, from which it started trading at about $25 per share. You know who else has made money? People who shorted the shares at the IPO.
Another reason for trader optimism are the continuing rumors that someone might buy SNAP. After all, Facebook bought Whatsapp, its messaging app, for $19 billion before the company was anything more than a chat application and that now looks like one of the greatest deals ever.
With Snapchat, the rumor is that Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) was interested in buying it for $30 billion. That’s a lot more than the present valuation, right? And the artists formerly known as Google could really use a consumer product like Snap to compete better with Facebook … right?
But the point is, nothing happened. Snap even denied there had been an offer. And why should there be an offer at $30 billion when the company is failing at $18 billion? Just because Alphabet has a lot of cash doesn’t mean it’s anxious to waste it. CFO Ruth Porat came to the company from Morgan Stanley (NYSE:MS). She did not fall off the back of the turnip truck.
Bottom Line on Snapchat
Snap did rally after earnings in August. The market was rising, especially for internet stocks, there was a lot of short interest in the stock, because Snap’s post-IPO lock-ups expired and employees were free to sell their shares. But traders love a short squeeze, and they squeezed those shorts hard. This is why I avoid shorting stocks because, even if you’re right, you can be made wrong by other traders taking the other side of the trade. As Tom Taulli noted, these are technical factors.
As an investor, I look for stories that can grow a niche without running into big competitors with the power to squash them like a bug. On the surface SNAP stock has that potential. But it also has a competitor that can squash it like a bug. That’s why I agree with Laura Hoy on Snapchat. If you made money on it, take your profits. If you’re looking for a long-term investment, buy Facebook.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in FB.
