Snap Inc (NYSE:SNAP) has fallen a whopping 22% since reporting a wider-than-expected quarterly loss on Nov. 7. Now that SNAP stock is trading under $13, and traders are beginning to wonder if the highly hyped millennial social network is a once-in-a-lifetime bargain buy.
News that Chinese counterpart Tencent Holdings Ltd (OTCMKTS:TCEHY) has quietly accumulated a $2 billion position in SNAP stock only raises the stakes: even if the company burns through its cash, there could be an acquisition play here.
However, I wouldn’t leap to catch the falling knife quite yet. While CEO Evan Spiegel has plenty of big plans to talk about, those dazzling developments have been on Wall Street’s radar for months and investors just aren’t buying the buzz.
Sentiment has moved beyond the point where promises of advertising-supported original content or a new look on the app — designed to make it simpler for non-millennials to navigate — will move the needle.
Until we get concrete confirmation that the changes have gotten cash flowing faster, the needle just doesn’t point up right now.
No Real Near-Term Deal
This doesn’t mean I’m bearish on Spiegel or his ability to execute. Snap Inc is a young and dynamic enough company to escape the Twitter (NYSE:TWTR) trap of early blockbuster success followed by years of user churn in search of a real strategy. But right now, skeptics need a reason to believe this stock was really worth the $29 it reached early this year or even its $17 IPO price.
The people who bought in at those levels wanted to convince themselves that they were getting the next Facebook Inc (NYSE:FB) at a deep discount, so they focused on the forecasts that made that trade work.
Now it’s clear that those optimistic models were off by at least six months to a year — and the big banks that underwrote the offering price are conceding that the sum of the parts here could only be worth $7-$11 until the strategy starts paying off.
If the big names on Wall Street don’t believe SNAP stock is a buy here around $12, it’s going to be hard to make real money in the near term. And don’t forget about the chart. Its downward bias tells me the next few months will test new lows before Spiegel gets his next chance to shift the narrative, which means there’s little incentive to grab shares at current levels.
Even those who like the long-term potential at $12 agree that a little patience now can turn into a lower entry and a shorter holding period before ultimate gratification.
Right now, few seriously think SNAP stock will be able to bring its cash burn below $1 billion a year before 2020 at the earliest. That’s a lot of time to wait around.
Of course, the Tencent headlines raise the prospect that Snap Inc may not be around that long as an independent entity, but I don’t think we need to jump in order to chase any huge acquisition premium right now.
For one, Spiegel will only sell when the bid outweighs his sense of what he thinks his company is worth.
That didn’t happen when Snapchat was a private company and it hasn’t happened since the IPO. If his confidence falters, it’s probably going to be out of desperation — and companies running out of cash rarely sell at a huge premium.
After all, Tencent accumulated those shares at something close to market price.
Odds are good they’re at least a little underwater as it is. Hold on. Let’s come back in a few months and see if the mood has thawed.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.