Snap Inc (SNAP) Stock Is Grasping at Threads with Placed Purchase

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It’s not exactly the most contrarian stance to be bearish Snap Inc (NYSE:SNAP), but it’s hard to see how management turns this ship around. The numbers point to a tenuous position in the social media marketplace at best.

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For its part, the market has demonstrated little faith since the IPO. From a purely financial perspective, you have to hand it to the bankers for pushing SNAP to go public at the time it did. That is, when user growth looked like it had a future and an upswing was believable.
You’ll note I don’t particularly give much credit to SNAP management, who seem to have benefited from luck more than anything. The subsequent decisions they’ve made have in turn made me further question the viability of SNAP as a leader in the social app marketplace, especially with aggressive moves by competitors like Facebook Inc (NASDAQ:FB).

Under such circumstances in such a fast-moving industry, SNAP can’t afford to make missteps at this stage. Larger companies with more attractive cash flows and strong relationships with advertisers are determined to wean that younger demographic away from SNAP and to their own respective platforms.

The race for users is well underway, and things aren’t looking great for Snapchat.

SNAP is Overpaying on Deals

Earlier this year, in what appears to be a rather desperate attempt to boost tepid earnings, SNAP bought Placed for over $200 million.

Placed is a consumer location analytics platform that SNAP had worked with prior on a deal with Twenty-First Century Fox Inc (NASDAQ:FOX) to measure ROI on promotions surrounding the release of X-Men: Apocalypse.

A dollar figure is just a dollar figure without context. The space is a bit light on comparable transactions, but early last year, Johnson Controls (formerly with Tyco) purchased ShopperTrak for $175 million. At the time, ShopperTrak already generated $75 million in revenue. And while we don’t have a specific revenue to date figure for Placed, my estimate at the most generous end of the spectrum would be $10 million based on a couple percent off of the disclosed $500 million in media spend that Placed has measured.

My gut says SNAP is overpaying for a company that, while it has potential added value, is not readily accretive in the way that drives share prices. With the obvious issues on the advertising revenue front, this deal felt like a last minute to keep revenues for second quarter earnings from dropping below expectations. Not exactly a thoughtful decision for the long-term.

SNAP User Growth (or lack thereof)

In addition to concerns regarding management’s strategic decision on the M&A front, there is the fundamental lackluster user data. The core of a social media platform is a growing and retaining its users. And what’s clear is that Snapchat downloads have been trending downwards.

According to data through the first half of the year, ever since Instagram Stories was launched, there has been a double-digit decline on this front. If the decline was a few percent year-over-year, I would be more inclined to think that SNAP could hold its own.

But when the figure is as large as 20%, correlated to the actions of a fierce competitor who is coming into the battle guns blazing, SNAP just hasn’t demonstrated that it can fend off such advances.

Without showing an improvement in user growth or corporate decision-making, SNAP stock will continue to plummet downward.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/snap-stock-grasping-threads/.

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