Snap Inc‘s (NYSE:SNAP) stock chart leads to one conclusion: the Snap initial public offering (IPO) was simply overpriced. After gaining 44% on its first day of trading in March, snap stock went pretty much straight down — but it’s stabilized over the past six months. Since July, SNAP has traded basically between $12 and $16, and sits in the middle of that range at the moment.
In other words, SNAP has traded like a normal stock of late. And if the IPO had been priced at, say, $10, or $12, with SNAP closing its first day at $15 or $17, the narrative surrounding the company and the stock might be very different.
I’ve argued in the past that a big problem with Snap stock has been expectations, not necessarily execution. Indeed, little in Snap’s reported financials so far should be a surprise to anyone familiar with the company’s pre-IPO growth trajectory.
But the problem here is that the post-IPO high of $29, reached on Snap’s second day of trading, still affects the stock. At less than half that price, Snap stock seems ‘cheap’ — or at least cheaper.
It’s not. Increasingly, it looks like even the recent range is far too optimistic.
Snap remains valued at roughly $15 billion, backing out the cash on its balance sheet. It’s not profitable, and it’s not growing fast enough.
Investors continue to give Snap stock a chance, perhaps believing it can be the growth stock many investors saw at the time of the IPO. But the fact remains that Snap never was that stock — and it likely never will be.
Snapchat Will Struggle to Expand
One key concern for Snap is that Snapchat increasingly looks like a niche business. Niche businesses, even in social media, generally aren’t worth $15 billion — or anywhere close.
For one, Snap looks limited from a demographic standpoint, with users generally in the 13 to 34 year-old age range.
There’s a broader problem here: the ‘disappearing’ nature of the content only appeals to a rather narrow age range. (Remember that Snapchat’s initial use case was for ‘sexting’.)
At 14, or 24, disappearing picture messages are attractive. At 38, or 48, they’re unnecessary, if not downright annoying. Standard text or Facebook Inc (NASDAQ:FB) Messenger work just fine.
If Snap doesn’t expand its demographic, its steadily decelerating user growth isn’t going anywhere. And neither is Snap stock.
Advertisers Aren’t Interested
Meanwhile, the other leg of revenue growth — growing revenue per user — may be hitting a roadblock.
A recent advertiser survey from investment firm Cowen & Co. showed buyers simply aren’t that interested in Snapchat. Those buyers prefer Facebook’s Instagram — which continues to imitate Snapchat — to Snapchat. Even Twitter Inc (NYSE:TWTR) gets better ratings in terms of social media offerings.
Snapchat does have an attractive demographic. But in terms of grabbing the diversified, global, blue-chip operators, its base isn’t large enough. And the company this week lost alcohol maker Diageo plc (ADR) (NYSE:DEO) because alcohol ads appeared in front of minors.
Here, too, Snapchat looks like the basis for a niche business. That’s worth something. It’s not worth $15 billion, though.
Snap Stock Remains Expensive
Meanwhile, Snap stock still trades at 12 times revenue, one of the highest multiples in the market.
Profitability remains a few years off. Revenue is growing quickly — the Street expects a 62% increase next year — but that’s mostly because this is an early-stage company still learning how to monetize its users. For that revenue to grow consistently on a multi-year basis, user growth has to become part of the story at some point.
I don’t think that growth is coming. Supposedly disappointing user growth figures have been cited as drivers of each of SNAP’s three post-earnings plunges. But the figure already had slowed to 5% in last year’s Q4, before the IPO. So the 3% increase (quarter over quarter) seen in the third quarter shouldn’t be any surprise.
At this point, Snap is what Snap is. Efforts to move beyond Snapchat have failed, as seen in the Spectacles flop. Snapchat itself is a messaging app with likely limited demographic appeal. It’s simply never going to have the appeal of broader, ‘safer’, offerings like those from Facebook and Google.
That’s all fine — at a certain value. The problem is that Snap Inc still is worth $15 billion, according to the market. By any reasonable measure, that’s simply too much.
As of this writing, Vince Martin has no positions in any securities mentioned.