Should You Buy and Hold Snap Inc Stock? Not on Your Life!

It’s hard to sit on the sidelines when unicorn IPOs hit the market. I know these stocks are going to skyrocket and the market will love them. Yet, I cannot justify getting into these unicorn stocks when they come to market losing money hand over fist. That might be acceptable if the business itself solved a problem and had a future. I don’t see how Snap Inc (NYSE:SNAP) stock does, and if you ask “is SNAP a good buy,” the answer is no way.

Why SNAP Stock Is a Bad Buy

SNAP stock lost $514 million in fiscal year 2016 and had a mere $404 million in revenue. Advertising accounted for 96% of Snap revenue. In and of itself, that’s not a problem, as we see that Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) are the same in that regard.

The difference is that GOOGL and FB are the 800-pound gorillas. SNAP stock is a monkey fetus by comparison and must deal with the 300 million people using Instagram (twice Snapchat’s 150 million). And it’s not a protected technology either; Facebook Messenger has “Facebook Stories” now.

Furthermore, SNAP stock doesn’t have much in the way of long-term advertising deals. Those deals are the result of having solid working relationships with ad buyers, with a history of how ads have performed. Snap doesn’t have nearly the history and data of FB and GOOGL. The latter two know what kind of ROI their ads should see. That’s not really the case yet with Snapchat.

Snapchat is not anywhere near as mature as FB was before its IPO, so the idea that Snapchat stock revenue was about 2/3 of what FB was making per user does not provide good support for an IPO.

Annoying Ads

There’s also a problem in that SnapAds interrupt content with ten seconds of advertising! That is unbelievably annoying, and because users can just swipe the ad away, that’s what they are doing. That will not play well with the advertisers, because they still get billed if the user swipes away their ad.

Next, nobody really understands that there are costs to hosting and delivering content. Bandwidth and storage are big costs for SNAP.  It costs money for Snapchat to send and store each piece of content. So far, revenue does not exceed cost on a per-post basis.

Bottom Line on SNAP Stock

Snapchat is burning cash like there’s no tomorrow. As a percentage of revenue, FB only blew through 10%, while SNAP burned through 109%. Also, there’s a share count issue. SNAP stock did not, in fact, skyrocket after its IPO because of its high share count. Moreover, lousy financials plus high share count means the shorts can pile on.

And the financials are lousy.

While revenue doubled in the first nine months of this year, expenses increased sixfold and led to a ninefold increase in net loss — from $350 million to $3.1 billion. Operational cash flow burn was $559 million (up from $443 million) and free cash flow was $621 million (up from $510 million).

I don’t see SNAP stock as anything more than a trading opportunity, and suggest you avoid holding it in your portfolio.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

 

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