Snap Inc (NYSE:SNAP) was one of 2017’s most disappointing initial public offerings. Shares of SNAP stock opened trading at 24. Within six months, they went on to lose half of their value.
From August onward, SNAP stock stabilized around the $14 mark, but did little else. Until last week that is. On February 7, Snap shocked the market with a smaller-than-expected loss, leading the stock to climb a remarkable 47% on the day.
Since then, SNAP stock has managed to hang on to most of its gains. Shares hit 21 in the initial euphoria, slipped back to 18, but moved back above 20 in Thursday’s trading session.
Here’s why you should take advantage of the higher price and get out of SNAP stock while you still can:
SNAP Stock by the Numbers
Snap’s earnings results did beat estimates for both EPS and revenues. EPS came in at a loss of 13 cents, versus expectations of a 16-cent loss. Revenues surged to $286 million, far ahead of the Street’s consensus $254 million view. And that $286 million sales figure pencils out to a solid 71% year-over-year growth rate.
Snap also reported its strongest daily average user (DAU) growth rate globally in the past year. DAU rose by 9 million, whereas the previous year had seen user gains of between 5 and 8 million per quarter. However, the big lever here was average revenue per user (ARPU). Snap’s ARPU surged from $1.17 to $1.53 on a global basis between the third and fourth quarters of 2017. Most impressively, ex-Europe and ex-North America, Snap’s ARPU nearly doubled, rising from 30 cents in Q3 to 56 cents in Q4.
The Catch With SNAP Stock
The issue, though, is that the company’s revenues appear to be highly seasonal. Snap’s ARPU hit $1.05 globally in Q4 of 2016. This outright declined to just 90 cents in Q1 2017, and moved back to $1.05 in Q2 2017. There is every reason to expect Snap will see revenues decline per user in Q1 and not reach new highs until the back half of the year.
And, in the grander scheme of things, Snap is still way below where it was supposed to be at this time. When Snap went public, analysts were projecting 2 billion in annual sales over the next year. This estimate has gotten ratcheted down again and again. Analysts had cut their 12-month revenue target to $1.6 billion by fall, and axed it again to $1.3 billion after November’s disappointing earnings.
So now, when Snap beats revenue estimates by a seemingly healthy amount, remember it’s largely just because analysts had thrown in the towel already. A 10% revenue beat this quarter hardly makes up for the fact that this business was supposed to be nearing $2 billion in annual run-rate sales already. And instead, trailing 12-month sales are still under a billion, and are unlikely to get much past the $1.3 billion that analysts are now looking for.
As a reminder, SNAP stock went public at $24 when investors were modeling in $2 billion in annual sales in 2018. We’re nowhere near that now, and yet the stock has recovered most of its post-IPO losses. The math just doesn’t add up for the valuation though.
SNAP Stock Is Expensive
Snap is unprofitable — even during its holiday quarter — so you can’t value the company on a price-earnings ratio basis. However, on a price-to-sales basis, SNAP stock is now back up to 30x. That’s obscene. Even for high-growth tech companies, 10x is usually seen as a threshold above which you should venture only with great caution. And Snap is at 3x that lofty level.
If Snap were growing profits dramatically, perhaps you could justify such a valuation. But it’s not. The company is unprofitable now and will be for (at least) the next 12 months. A comparison is in order. Twitter Inc (NYSE:TWTR) sold at 5x price/sales (one-sixth of Snap) for much of 2017 before its recent run-up. Twitter just announced blowout earnings numbers, and is likely to hit the crossover point and go positive for full-year EPS in 2018 — despite that it’s still just trading at 9.5x price/sales. What’s the justification for Snap at 30x with no foreseeable road to near-term profitability?
And things actually get worse when you turn to the income statement. Snap burned through $197 million in Q4 of 2017. This was a modest improvement from earlier quarters in 2017, where the company lost more than $200 million per quarter in cash. However, in Q4 2016, Snap only lost $188 million in cash. That’s right — despite its 70% year-over-year revenue growth and narrower than expected accounting loss, it actually consumed more shareholder cash than the previous year’s holiday quarter.
Take Profits on SNAP Stock
I know it feels like Snap is turning the corner. This quarter was the first where Snap solidly outperformed analyst expectations. After so much negative news, a rally like that feels like the bears capitulated. Some 18% of SNAP stock was shorted heading into earnings, and surely a lot of those skeptics had to fold their positions, given the ensuing price action.
Additionally, Snap fans can point to Facebook Inc (NASDAQ:FB) recently admitting that it lost almost 3 million under-25 U.S. users last year. In theory, Facebook’s loss should be Snap’s gain.
But I just don’t see it. Snap hasn’t built much of an ecosystem. It’s largely a slow-growing app that still seems rather faddish.
Don’t kid yourself about the growth rate. Between Q4 2016 and Q4 2017, global daily Snap users grew by less than 20%. That’s simply not the sort of rate you need to see to support a 30x price/sales ratio on a company burning nearly a billion in cash every year.
Snap stock-owners may see this as the next Twitter-type turnaround story. But there’s a key difference: Twitter has started earning money whereas Snap is still running mountains of red ink.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.