Shareholders of Snap (NYSE:SNAP) finally have seen some good news of late. SNAP stock has bounced some 35% over the past few weeks.
Of course, that bounce is coming after SNAP hit an all-time low below $5 in December. And SNAP has shown signs of life before. There was a big jump after Q4 earnings in February 2018, one that unsurprisingly didn’t hold.
SNAP gained about 30% in the first few weeks of June; those gains, too, quickly were lost.
This bounce, too, likely won’t last. Snap Inc still has a number of problems and SNAP stock still isn’t cheap. It’s a tough combination, and for these five reasons it’s a combination that makes SNAP stock one that investors should avoid.
Management Concerns Persist
Last year, Snap redesigned the Snapchat app. At the time I argued that the redesign alone couldn’t save SNAP stock. But as it turned out, the redesign did more harm than good.
Celebrities including Kylie Jenner immediately voiced their distaste. Regular users didn’t seem much happier. CEO Evan Spiegel since has admitted that the redesign was rushed. A detailed report in the Wall Street Journal showed that Spiegel decided on the overhaul after visiting China and pushed the changes through despite concerns from engineers and other senior managers.
For a company trying to track down Facebook (NASDAQ:FB), in particular, and competing with Alphabet (NASDAQ:GOOG,GOOGL), Twitter (NYSE:TWTR), and now Amazon.com (NASDAQ:AMZN) for online advertising dollars, management needs to be better. But with a dual-class setup, there’s little shareholders can do to push for change.
Snapchat Hardly Looks Differentiated …
Speaking of Facebook, that company clearly has tried to strangle Snap by essentially copying all of its features. And while that move seems somewhat unfair, it’s been effective. Instagram’s user growth has continued to soar. For Snapchat, on the other hand…
… And User Growth Has Stalled Out
Snapchat’s user growth has basically flatlined. User growth became a concern soon after the company’s IPO: last year, y/y growth went from 5% in Q1 to 4% in Q2 to just 3% in Q3.
Since then, growth hasn’t really improved. Daily active users(DAUs) actually declined 1% quarter-over-quarter in Q3 (though they did increase 5% against the year-prior period). For a company whose international opportunity is supposed to drive sales and earnings growth, that’s not good enough. In fact, it’s not even close.
Snap can grow, and has grown, revenue by better monetizing those users. But to get back to impressive growth, Snapchat simply needs more users. A base under 200 million puts a ceiling on Snap’s revenue and profits.
SNAP Stock Isn’t Cheap
And if that ceiling does exist, SNAP has a real problem because it’s not cheap. SNAP is cheap(er) than it was a few months ago or at its IPO, but the valuation still incorporates quite a bit of growth. SNAP trades at over 4x 2019 revenue estimates, even backing out net cash.
Admittedly, that’s quite a bit lower than the 10x+ SNAP has received at times. But it’s not that low considering Snap still is unprofitable. At the midpoint of fourth quarter guidance, Snap’s Adjusted EBITDA for 2018 should be roughly negative $650 million. That doesn’t even include what should be over $500 million in stock-based compensation.
Snap still is a long way from profitability. That alone doesn’t suggest more downside for SNAP stock, but it does require revenue growth to accelerate at some point. Again, without more users, that seems unlikely.
An Acquisition Isn’t Coming
With profitability still years off at best, it’s tough to see what the catalyst for SNAP can be on its own. Users could accelerate – but that seems unlikely. Snap Inc can’t cut costs as it’s trying to attract advertisers and reach users.
And an acquisition makes little sense, particularly at this point. Twitter, with a larger user base and a more established offering, tried and failed to sell itself. With Instagram looming, an acquisition of Snap seems particularly unlikely.
All told, that leaves a tough bull case. The company isn’t profitable or close. It’s not growing users. It’s not going to be taken out. So how, exactly, do shareholders win?
SNAP may seem cheap, at a substantial discount to its highs and even its IPO price. But at 4x+ next year’s revenue, the stock still is pricing in improvement. It’s tough to see that coming, which means it’s tough to see SNAP stock moving much higher.
As of this writing, Vince Martin has no positions in any securities mentioned.