Snap Inc (NYSE:SNAP) still finds itself reeling from its 22% drop following its earnings report in early May. Now, as the stock hovers near all-time lows, investors find themselves questioning this company’s future. Snapchat still enjoys high and increasing popularity among youngsters, but investors should filter SNAP stock from their portfolios.
The earnings report for SNAP stock appears more positive at first glance. Revenues grew 54% from year-ago levels. First quarter losses came in at $385.8 million. Although the loss met expectations, it represents a massive improvement from the same quarter last year.
SNAP lost $2.21 billion in the first quarter of 2017. The number of daily users has also risen from 166 million to 191 million, a 15% increase.
Why Wall Street Ignored the Good News on SNAP
So why did SNAP continue to suffer?
The short answer: lack of an adequate path to monetization.
I do not necessarily mean the 65% decline in ad prices. This happened due to a move away from a direct sales on the ads. The so-called “programmatic” system proved itself a poor replacement and will likely be partially or completely reversed.
Still, in an ad environment where the company must compete with Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR), gaining traction on ad pricing could prove challenging. The core Generation Z users, who earn little of their own money, limit the potential on ads.
SNAP Lacks a Clear Path to Profitability
The company’s cash burn rate and lack of a clear path to profitability also present obstacles. As a result, analysts predict annual losses through at least 2021. The latest release of Snapchat Spectacles proved a disaster. Regarding new features, there seem to be no new Snapchat features which Facebook or its picture app Instagram cannot take away. Such became the fate of “Stories.”
In light of the challenges above, SNAP remains pricey. Even after the price drop, SNAP trades at about 14.75 times sales. Its valuation stands at over 4.8 times the company’s book value. Moreover, the company still holds a market cap of around $13.3 billion. Without a clear path to profitability, this prices the stock too high to attract buyout offers.
This is not to say SNAP stock is dead. As I mentioned earlier, the user base stands at 191 million and continues to grow. Assuming SNAP can find its path to monetization, the numbers exist to help it build a viable business. Also, if the stock falls into the low single digits, the large user base and growing buyout prospects would make SNAP stock worthy of speculation.
The Bottom Line on SNAP Stock
Despite the recent drop, uncertainty and a high valuation make SNAP one to avoid at its current price. To be sure, its revenue and user growth remain strong. Despite its issues with ad revenue, the company has come a long way in stemming its massive losses.
However, SNAP has found itself unable to develop applications that can both attract users and make the company money. Moreover, a high price-to-sales ratio and its $13.3 billion market cap make the company appear overvalued despite the stock trading at record lows.
The one thing going for SNAP is its growing user base. If Snap can invent applications that both increase revenue per user and attract users well outside of its current core teenage market, SNAP could turn around.
Still, I think a competitor will buy SNAP when it falls to a much lower price. If the price drops below $3 per share, SNAP stock might become a speculative buy. At that level, a potential buyout or a dead-cat bounce in the stock price could profit investors. Until then, investors should sell this company in a snap.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
