Snap (NYSE:SNAP) has been a total and utter disaster. What other way can we put it? Snap stock is down a whopping 50% so far this year and more than 70% from its highs. Heck, even from its March 2017 IPO price of $17 per share, SNAP shares are down almost 60%.
Okay we get it, Snapchat stock has been huge loser. But are the tides about to turn?
I don’t have any conviction that that’s the case and as a result, I simply cannot say that I believe SNAP is a buy. I have remained steadfast in my belief that investors should avoid Snap. The support for the bear case is staggering, while the support for the bull case is quite thin.
The Bull and Bear Case on Snap Stock
The bull case was simple: A small float could drive shares of SNAP significantly higher. That was the case with companies like GoPro (NASDAQ:GPRO), Fitbit (NYSE:FIT) and Shake Shack (NYSE:SHAK). Additionally, investors made the case that Snapchat was becoming the most popular social media app among younger users.
Both of those facts were true and it gave shorts hesitation when looking at the stock. However, the bear case ultimately made better points.
For starters, who would you rather advertise to, a 40-year-old or 14-year-old? Facebook (NASDAQ:FB) targets former while Snap appeals to the latter. But which user has more money and who’s more likely to convert a return on that advertisement for both the advertiser and the platform that it’s on? That’s right, the 40-year-old.
Further, the ad layouts are totally different. Twitter (NYSE:TWTR), Facebook and Instagram have ads that linger on the timeline, allowing users to view it, think about it, digest it and decide whether they want to explore it. I handle Snap’s mini-ads the way I do pop-ups and exit them as quickly as possible.
Ad placement and targeting aside, it didn’t help that Snap’s valuation was (and still is) absurd. Making matters worse, the management team has had plenty of turnover, while Snap burned through cash and couldn’t turn a profit. Bottom-line results aside for a moment, Snap stock traded with a price-to-sales ratio vastly above Facebook, a company that’s incredibly profitable.
Where does that make any sense? The argument was that Snap was growing sales faster. But no matter how hard I tried, I can’t make sense of this thesis. The bear theory wins, hands down.
Trading Snap Stock
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With Snap stock plunging to a 52-week low of $6.46, it would appear as though the bear case has played out. To some extent, I agree with that notion. After all, the best case for shorts is a stock that goes to $0. While I viewed Snap stock as overvalued and its potential as overestimated, I don’t think it’s completely worthless. After all, we’re still talking about a company that will generate sales north of $1 billion this year, up 40% from 2017.
The question then becomes, how much is it worth?
Unfortunately, I don’t know that answer. What I do know is that, at roughly 9 times this year’s sales estimates, Snap stock still seems to expensive for me, given that it’s not profitable and continues to generate negative free cash flow. The risk/reward for being short Snap stock was a lot better at $20, $15 and even $10 than it is down here near $7.
Could it go to $5? $3? Probably.
But at some point, another company will acquire Snapchat and use it as a medium for generating revenue and user engagement. With that said, I don’t consider Snap a buy right now either. I would rather be long Twitter and if I had to choose, FB too. Look to see if the steep downtrend resistance near $7.50 (blue line) plays a role. Also see if the 20-day gives the stock trouble.
Maybe Snap stock can rally to $9, but I expect the upside to be quite limited until management can improve the fundamentals.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no positions in any stocks mentioned.
