Surprise! We got that post-lockup expiration bounce in Snap Inc (NYSE:SNAP) stock. Over the past month, SNAP stock is up more than 25%.
I’m not going to say everyone saw that coming, but it was a pretty predictable move higher. The big social media companies all did the same thing. They sold off into their lockup expiration dates, and rallied afterwards. Facebook Inc (NASDAQ:FB) bounced after its lockup expiration date; so did Twitter Inc (NYSE:TWTR). LinkedIn Corp (NYSE:LNKD) bottomed out about a week after its lockup expiration date.
So when SNAP sold off dramatically into its lockup expiration, the writing was on the wall for a mini-bounce after the expiration date passed.
We got that bounce.
So, now what?
Snap Doomed for a Twitter-Like Ending
After the lockup noise was in the rear-view mirror, FB stock took off. A huge, thesis-changing quarter in July 2013 underscored Facebook’s mobile-first growth story. The stock popped 30% in a day and never looked back. Today, FB trades for around $170 a share, versus a low of about $20 around its lockup expiration date.
LNKD followed a similar trajectory as FB.
LinkedIn reported blowout results in its February 2012 quarter and the stock rallied some 18%. The following year, in its February 2013 report, LinkedIn again reported blowout results. The stock rallied more than 20% that time. Overall, a series of blowout reports thrust LNKD stock from a $60 bottom around the lockup expiration date to an eventual acquisition by Microsoft Corporation (NASDAQ:MSFT) at $196 per share in 2016.
Those are two pretty big success stories.
But TWTR followed a very different trajectory. That company never really had the thesis-changing, blowout quarter it needed.
Instead, the stock headed lower every quarter as user growth stalled, ad revenue problems came to the forefront, and the company failed to illustrate GAAP profitability.
So, here is the billion dollar question: which path will SNAP follow?
Well, SNAP is heck of a lot more like TWTR than it is like FB. Snapchat currently has 173 million daily users. Twitter had around 230 million monthly users prior to its IPO. Facebook had 900 million monthly users prior to its IPO.
Snapchat is adding about 5 to 8 million new users per quarter. Twitter was adding around 14 to 20 million new users per quarter prior to its IPO, while Facebook was adding around 50 to 60 million new users per quarter.
Last year, Snap raked in around $404 million in revenue. In its last complete fiscal year before the IPO, Twitter raked in about $317 million in revenue. Facebook’s annual revenue prior to IPO was $3.7 billion.
Snapchat isn’t profitable. Twitter wasn’t profitable either prior to its IPO. Facebook was profitable (for what it’s worth, so was LinkedIn).
This compare-and-contrast exercise says something about Snapchat. It’s not a big-reach platform. Just as Twitter had its limited-character messages, Snapchat has its disappearing photos.
But not much else.
The reason Facebook succeeded in this space is because it was a big-reach platform with all-encompassing appeal. It transformed into a utility that everyone needed rather than a social media platform that only the kids use. LinkedIn succeeded as well, because it too was more of a utility than a social platform.
But Twitter and Snap? They are just social platforms without much economic moat other than their limited-character messages and disappearing photos.
Bottom Line on SNAP Stock
Remember when tweeting used to be cool? And hashtags were something all the cool kids were good at?
Now, snapping is cool. And making an eye-popping Snapchat story is something all the cool kids are good at.
Snap will ultimately end up like Twitter. A 200- to 350-million-user platform with limited engagement and no clear path to profitability.
That doesn’t warrant an $18 billion valuation. After all, Twitter is worth only $13.2 billion. Snap deserves a similar valuation — which implies a big downside.
So stick with the script and buy FB, sell SNAP.
As of this writing, Luke Lango was long FB.
