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Snap Inc (SNAP) Stock: Sorry, but There’s No Reason to Buy These Shares

Facebook and Twitter provide reasons for being long, SNAP stock does not

By Bret Kenwell, InvestorPlace Contributor

http://bit.ly/2j7IqwG

Of the three main players in the the social media space — Twitter Inc (NYSE:TWTR), Facebook Inc (NASDAQ:FB) and Snap Inc (NYSE:SNAP) — I have reasonable arguments to buy only the first two. As it stands, though, there’s no reason to buy SNAP stock.

Snap Inc (SNAP) Stock: Sorry, but There’s No Reason to Buy These Shares
Source: Shutterstock

FB is a best-in-breed stock. The company has stellar user growth and insane sales increases for a near-$500 billion company. Margins are fat and profits are big. Because of Facebook’s impressive bottom line, it makes its valuation pretty reasonable. One could even argue that FB stock trades at a discount when evaluating it several years out.

TWTR stock is not best-in-breed. Its user growth is lower than both Facebook and Snapchat. Last quarter, revenue went the wrong direction. And while there are issues, there is also value. Twitter is a tangible asset that serves a meaningful purpose. It’s a news center and real-time search engine. It may become a go-to streaming platform. If Twitter unlocks this value, TWTR stock is massively undervalued with a $12.5 billion market cap.

Snap, though? Shares are down more than 11% from its $17 March IPO price and more than 50% from all-time highs. I’m not sure that the decline is enough, honestly. Let’s look at why.

What’s Up With Snap?

After going public, it almost seems as if a weight was lifted off CEO Evan Spiegel’s shoulders — like that was the ultimate accomplishment, not a new obligation. Now he can take a vacation — or a “bro trip” — get some rest and recharge. At some point though, he needs to figure out what Wall Street’s trying to tell him. The company has now reported results twice, missing on earnings and revenue estimates both times. That’s bad.

What’s good? Daily active user (DAU) growth grew 21% year-over-year and 4% quarter-over-quarter. However, when we look at the whole picture, SNAP stock is still a troubling investment. In short, these are the issues:

  • The valuation is still very high, despite Snap’s big selloff
  • It’s competing directly with Facebook and the social network’s Instagram platform.

A Closer Look at These Issues

Analysts expect Snap to lose money in 2017 and 2018, but revenue forecasts call for 82% growth in 2018. We knew SNAP stock was overvalued when it was trading with a price-to-sales (P/S) ratio north of 40 times. However, Snap still trades at high levels, with a P/S ratio of 28.6. For comparison, FB stock trades at 14.8 times sales, which are forecast to grow 41% this year and 30% in 2018. Despite the slower growth rate, FB is the more-attractive option given its similar user growth and immense profitability.

Snapchat is a way for (mostly) young people to communicate and digest short-form news stories. It’s great from a product standpoint, but it’s hard to see how it translates to big profits down the road. Twitter is full of real-time events, news and analysis.

 

FB connects billions of people in a more meaningful way and now has video coming as well. Facebook’s Instagram is also doing better than Snapchat. In fact, Instagram’s Stories features — which it did rip-off from Snapchat — has more DAUs (250 million) than all of Snapchat’s DAUs (166 million users).

Therein lies the problem. Facebook is best-of-breed, worthy of a premium valuation. Snapchat competes head-to-head with Facebook and its Instagram property, is not best-of-breed and trades at a higher valuation than FB. Twitter trades at less than 5 times sales and is down-and-out. However, to me it’s in value territory. It has a non-premium valuation (which is deserved) and doesn’t compete head-to-head with Facebook or Instagram.

I see value here. In essence, I can justify owning FB or TWTR, but not SNAP.

Trading SNAP Stock

Make no mistake. This isn’t to say Snapchat is worthless or that management can’t improve the model. I just find the other two players more attractive. For the first six months of 2017, Snap has lost almost $3 billion. That’s pretty significant considering it sports a market cap of less than $18 billion.

Snap would have to significantly reign in costs over the next 1-3 years, boost gross margins (just 16.25% last quarter), and continue to grow revenue at a significant pace for the foreseeable future. It’s a solid platform, but I just can’t trust management to execute at this point. I would rather be long FB or TWTR. Additionally, a ton of stock unlocked over the past few weeks.

Early investors and employees can now sell a massive amount of SNAP stock. So far, that hasn’t been the case, which is good. However, it’s likely only because SNAP is down so much. On any meaningful rallies, it wouldn’t be unrealistic to expect further selling pressure. I don’t like that, nor do I like Snap’s valuation. Not to mention FB CEO Mark Zuckerberg seems highly focused on destroying Snapchat, another not-so-great attribute.

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, https://investorplace.com/2017/09/snap-inc-snap-stock-sorry-but-theres-no-reason-to-buy-these-shares/.

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