Even as It Starts Popping, SNAP Stock Is Not for the Risk-Averse

SNAP stock still needs a way forward

As I write this, Snap (NYSE:SNAP) is rocketing 23% higher in pre-market trading. By the time you read this, SNAP stock will likely be at its highest level since September. If you are short SNAP stock, I don’t envy you.

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It is evident by the market’s reaction to Snap’s Q4 2018 earnings report that investors are happy with the news Snap managed to not lose any more daily active users (DAUs) in the fourth quarter. Analysts were expecting 184.9 million; Snap delivered 186 million, a sign DAU leakage might be over, at least for now.

For a stock that’s lost billions in market cap the past year, this can only be viewed as good news but is it enough to convince investors the worst is behind it?

Yes, It’s Enough

In the company’s conference call with analysts, Snap interim CFO Lara Sweet indicated that the company expects to deliver a repeat performance in Q1 2019.

What about the earnings themselves?

In the fourth quarter, Snap revenues increased 36% to $390 million, a record, while its adjusted EBITDA improved 69% to a loss of $50 million. For the year, its revenues rose 43% to $1.2 billion with a 20% reduction in its adjusted EBITDA loss of $576 million.

In addition to flat DAUs in the first quarter of fiscal 2019, Snap expects revenue to grow by at least 24% to $285 million while its adjusted EBITDA loss is projected to drop by at least 24% to $165 million.

Toss in a whole bunch of positives in terms of user engagement and client feedback (for example, NBC News said that two-thirds of Snapchatters watching its Stay Tuned show were new viewers) and it’s hard not to get excited about the future.

The big question is will it last?

Nomura Instinet analyst Mark Kelley believes it could.

“The two most positive pieces of the 4Q story were that the user base stabilized, and the redesigned Android app has been rolled out selectively after a fairly long wait; the company expects a broader rollout to other geographies sooner rather than later,” Kelley wrote about Snap’s Q4 2018 performance.  

No, It’s Not by a Longshot

Most of the analyst commentary I’ve read seems to put a great deal of emphasis on Snap’s new Android app. Specifically, the company’s managed to stem the exodus of users and now must grow DAUs by attracting Android users to the app.

“These results are driving near-term appreciation but, in our view, SNAP’s ability to successfully roll out its new Android app throughout 2019 (and meaningfully increase its user base) will be key to driving better user growth, higher earnings power and further multiple expansion,” said Morgan Stanley (NYSE:MS) analyst Brian Nowak.

Except for Goldman Sachs (NYSE:GS) analyst Heath Terry, who talked about the ongoing monetization potential, the five analysts’ comments I read all emphasized the Android app as a key lynchpin in Snap’s future success.

Snap CEO Evan Spiegel put it best in the conference call.

“The way to think about it in terms of Android opportunity there’s roughly two billion or so, maybe more two billion who are on Android and don’t have Snapchat,” Spiegel said. “So if we can take a few percent market share there it’d make a real difference to our user base.”

Easier said than done. If it were that simple, you would think Snap would have rebuilt the Android app a long time ago. I guess we’ll find out in the next year if Spiegel’s comments are on the money.

The Bottom Line on SNAP Stock

I am not a fan of Snapchat. Nor am I fan of its stock.

However, last September, I did recommend SNAP for aggressive investors under $10. By the end of December, it was trading below $5.

As a rule, I generally don’t invest in stocks that are losing money. There are exceptions, but only when there is a clear pathway to profitability. Is Snap providing such a path?

The company still lost $576 million on an adjusted EBITDA basis despite a much stronger fourth quarter. Its free cash flow in 2018 was -$810 million, a mere nine million better than a year earlier. That’s hardly a pathway.

I would not buy SNAP stock. However, if “risk” is your middle name, there’s enough meat on the bone at this point to justify a nibble.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/02/snap-stock-is-not-for-the-risk-averse-simg/.

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