My take on Snap Inc (NYSE:SNAP) really hasn’t changed since its 2017 initial public offering. I believe SNAP stock is too expensive — but not necessarily for the obvious reasons.
This is, after all, a decent business. As of the end of the first quarter, Snapchat had 191 million daily active users. Yes, Snap Inc is unprofitable. But it should be unprofitable. It’s still working on its platform, including a recent redesign, that admittedly was not particularly cheered by users. Snap Inc still has to learn how to sell advertising — and develop the employees to do that work.
It’s only scratching the surface of its international potential. Per the 10-K, revenue per user in North America was $2.75 last year. It was $0.66 in Europe and $0.56 in the rest of the world. And I’d point out that the company itself isn’t yet seven years old.
Indeed, part of the problem here simply is that the market’s expectations were too high. It’s not CEO Evan Spiegel’s fault that investors went crazy over the IPO of SNAP stock. He didn’t force any investor to pay over $20 per share soon after that offering — or in February.
Ignoring SNAP stock for a moment, and looking solely at the business, Snap Inc remains an intriguing early-stage growth company. But that stock — even at $13-plus — simply is too expensive. And 16 months after the IPO, there’s another problem for SNAP. Valuation aside, I can’t quite figure out what the compelling reason to buy SNAP stock is supposed to be.
The Upside Case
To get truly excited about SNAP at a nearly $17 billion valuation, there needs to be a possibility of substantial upside. And the obvious model is larger rival Facebook (NASDAQ:FB).
It’s easy to forget, but Facebook was considered a major disappointment after its IPO. At its lows, FB stock had lost more than 50% of its IPO price. The criticisms surrounding SNAP soon after its IPO sounded awfully similar to those made toward Facebook.
And, of course, since those lows, FB stock has gained over 1,200%. It’s worth over half a billion dollars — and to my eye, still looks cheap.
Even a minimal chance that SNAP could reach those levels would add substantial value to SNAP stock at the moment. But the chance of Snapchat becoming the social media platform — and displacing Facebook — looks close to zero.
The Cambridge Analytica scandal offered a narrow window for Snapchat to break through. But Snap’s redesign — clearly framed as a counterpoint to Facebook’s “fake news” problem — only alienated existing users, instead of bringing in new ones. DAUs grew just 2% quarter-over-quarter in the first quarter, Snap’s lowest growth rate as a public company. Even with poor headlines, Facebook’s DAU growth year-over-year in the quarter (167 million) was nearly as large as Snapchat’s entire user base (191 million). If anything, Facebook’s position seems only strengthened relative to where it was a few quarters ago.
Heck, even Instagram Stories now has double the users of Snapchat. The dream of Snapchat ever displacing Facebook seems all but dead.
Other Catalysts for SNAP Stock?
So what else is there, really? Snap Kit probably helps — a bit. It doesn’t move the needle against a $15 billion enterprise value, however. The company’s reported entrance into gaming has drawn some bullish commentary. But social gaming company Zynga (NASDAQ:ZNGA), net of cash, is worth about $3 billion. That type of opportunity — which would take years for Snap Inc to develop and monetize — isn’t material against that valuation, either.
Snap Inc isn’t profitable — or close. (Adjusted EBITDA loss actually rose in Q1.) It’s not cheap on a revenue basis, at about 13x EV/revenue. Twitter (NYSE:TWTR), which is profitable, and which has soared of late, is at 11x. On a per-user basis, SNAP stock is cheaper than TWTR — but given lower monetization, it probably should be.
So what exactly are investors buying here? A potentially third-place social media company? One that actually calls itself a “camera company,” despite zero success in hardware?
Again, if you ignore valuation, there are some things to like about Snap Inc. Nearly 200 million users in less than seven years is an impressive accomplishment. Revenue is going to grow for some time, simply because revenue per user has so much upside as Snap competes for dollars with Facebook and Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG).
But an investor can’t just ignore valuation. And at $15 billion, with profitability still a long way off, SNAP stock still is priced as if Snapchat will become a powerhouse at some point next decade. Looking at the business itself, I continue to question what there is to support that belief.
As of this writing, Vince Martin has no positions in any securities mentioned.
