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Snap Inc Could Rally 30%, But Here’s Why It’s Still a Pass

Go with Facebook or Twitter over SNAP stock

By Bret Kenwell, InvestorPlace Contributor

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Snap Inc (NYSE:SNAP) didn’t make new lows after its most recent earnings report — but it should have. I don’t see what people like about this company. Below its IPO price, some may be wondering if Snap is a good buy now. I don’t think so and still find SNAP stock overvalued.

Valuing SNAP Stock

My problem is that I can’t accurately assign a value to Snapchat stock. I don’t care that Tencent Holdings Ltd (OTCMKTS:TCEHY) invested in the company, buying almost 150 million shares in the open market. The shares — like all the rest — are non-voting, which is a frustrating consideration in its own right. Clearly management has shown that it needs shareholders — particularly like Tencent — to have voting rights.

This kid, CEO Evan Spiegel, is not Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg. Yet he takes a massive $800 million bonus for going public, whiffs on three straight quarterly earnings reports and brings to the public markets a stock without voting rights.

Get out of here, man.

Snap is losing money hand over fist. It’s squandered $443 million in two straight quarters, registering a nearly $900 million net loss. That’s non-inclusive of the $2.2 billion net loss swallowed in the quarter it went public. It’s not just a recent problem, either. SNAP has lost a combined $294 million in the two quarters prior to going public as well.

Worse, on the conference call, Spiegel told investors that a big overhaul will happen on the Snapchat app. This could be “disruptive to our business in the short term,” he said. User growth continues to come up short as Facebook’s Instagram wreaks havoc.

Am I being harsh? You better believe it. But is it unwarranted? I don’t think so.

Is There Hope for SNAP Stock?

Surprisingly, I think there is. Tencent has a more than 10% stake in the company, which soaks up some of the excess supply hanging around in the open market. They want to help Snapchat make games on its platform. That could have potential, as could management’s planned app overhaul.

I hope those changes do come to fruition. I just don’t see how we can value this company at $16.2 billion right now. Granted, it has almost $2 billion in cash and no debt, which is a positive. But Snap has lost almost $1 billion in the last six months. Further, it’s burning too much cash, with a $220 million free-cash flow deficit just last quarter.

It doesn’t matter to me that Snap may double its 2016 sales figure this year and grow revenue another 64% next year. Why? Because SNAP stock trades at a whopping 25 times sales, almost double the best-in-breed FB. Twitter Inc (NYSE:TWTR) trades at just 6.25 times sales, and I think TWTR is a better buy too. And that’s not just after the massive rally: We liked it before then too.

Snap has a really intriguing platform and has a chance to make positive changes. But right now, and especially in the short-term, it doesn’t have momentum. I mean, sales came up 12% short of analysts expectations last quarter. That’s a huge miss. Advertisers aren’t willing to pay a premium, which hurts both the top and bottom line, and user growth keeps coming up short of consensus expectations. There are problems and they’re not short-term in nature.

Trading SNAP Stock

Snap stock chart
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Despite all this, SNAP stock actually looks like it could have some upside. If it can get above $13, Snapchat stock could gain further momentum. In fact, over $13, SNAP stock is a tempting buy, but with such a lacking fundamental story I just can’t bring myself to do it.

Of course, $13, which was previous support, could also act as resistance. Without the Tencent investment, investors would have likely driven SNAP stock back down to its 52-week lows at $11.28. For now, I don’t know if that’s in the cards right now.

While it’s unclear how the $13 level will shake out, it’s very clear that the IPO price of $17 will be stiff, stiff resistance. A rally from $13 to $17 would represent a gain of 30% for Snapchat stock, but like I said, it’s tough to buy given the fundamental picture.

For now, I will stick with either Facebook or Twitter stock. Twitter is showing promise and Facebook continues to prove why it’s so dominant in tech. Snapchat doesn’t show either of those things right now and that’s why it’s a pass.

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/2017/11/snap-inc-stock-could-rally-but-still-a-pass/.

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