Snap (NYSE:SNAP) stock is soaring. Snap stock gained 22% after its Q4 report earlier this month and it’s now bounced 89% from an all-time low reached in late December.
Admittedly, I got it wrong. I wrote ahead of earnings that Snap stock would go from bad to worse. But I’m still as bearish on SNAP as I was two years ago, and I still believe the market eventually will sell this news, too.
After all, Snap earnings might have been better than expected, but they weren’t good. The company remains sharply unprofitable. And $12 billion market cap still looks unsustainable and unsupported by even the Q4 numbers.
Snap admittedly has made some progress – and perhaps enough to keep SNAP stock from being a short. But that’s a far cry from arguing that SNAP is headed back toward the double-digits – or that it even can hold the current price just above $9.
Were Snap Earnings Good?
Snap’s Q4 earnings report admittedly had some good news. Revenue grew 36% year-over-year, about 4.5 points better than Street estimates. An adjusted net loss of just $0.04 compares favorably to consensus expectations of -$0.19.
Daily active users, at 186 million, were better than expected as well. And with the figure flat quarter-over-quarter, and down just 1 million year-over-year, it does look like the user base stabilized.
The fact that Snap could grow the top line 36% on flat users shows that it is becoming more effective with advertisers – and becoming a more fearsome competitor to online advertising giants Alphabet (NASDAQ:GOOGL,GOOG), Facebook (NASDAQ:FB), and Twitter (NYSE:TWTR).
There’s a case that the quarter at least is a step in the right direction. After a redesign that didn’t work, management turnover, and trouble on the ad sales front, Snap definitely made progress in Q4.
At the same time, however, the quarter highlights a number of the concerns surrounding Snap. Is it good news that user growth was flat? This remains a stock valued at 7x next year’s revenue. Ad rates are growing but can’t do so forever. Ad rates for Google, for instance, have been falling for most of the decade.
Snap still lost over $50 million even in Adjusted EBITDA in Q4: it needs sustained, multi-year revenue growth simply to get that figure positive, let alone drive reasonable free cash flow.
Snap may have made some progress in Q4, and even for full-year 2018. But any reasonable investor has to believe that there’s still a long way to go.
Snap Stock Has Been Here Before
For investors trying to catch the post-earnings wave, it’s worth remembering that SNAP has made these types of moves before. SNAP spiked 30% in a few weeks in June. After last year’s Q4, SNAP stock soared, too. It would clear $20 and then lose 75% of its value in the next ten months.
Short-covering no doubt has driven some of the post-earnings gains. That in turn suggests a potential “dead cat bounce” rather than a significant change in trajectory. So does Q1 guidance, which actually was modestly disappointing. Revenue is expected to grow 24-34% year-over-year – a notable slowdown from the 36% in Q4 and the 43% in Q3.
That guidance suggests the top line will increase $55 to $80 million year-over-year next quarter. As a point of reference, Adjusted EBITDA was negative $218 million in Q1 2018. In other words, Snap still is going to lose quite a bit of money and burn quite a bit of cash in Q1, and for full-year 2019.
SNAP Stock Isn’t Cheap
While SNAP is cheaper than it was, it still isn’t cheap – or close. As noted, the stock trades at 7x 2019 revenue. Adjusted EBITDA in 2018 was a loss of $575 million. Just to support the current $9 share price, that figure probably needs to reverse by about $1 billion.
Snap only generated $1.18 billion in revenue for the entire year in 2018. That figure needs to potentially triple (or close) for Snap Inc to be worth $12 billion. That will take years on the current trajectory – assuming Snap doesn’t stumble again.
That’s a big assumption. Between the erroneous app redesign and executive turnover, management here has been inconsistent. Snap is doing a better job monetizing users, but without user growth is there really room for a 150%+ increase in ad revenue per user? Twitter and Facebook already have copied key Snapchat features and could again target their smaller competitor if results improve.
There’s a long, long way to go for Snap. And even with the stock down 53% over the past year, quite a bit of progress is priced in. Snap showed some of the progress in Q4. But it’s only one quarter; Snap needs to put together a better year, at least, before investors can get too excited.
As of this writing, Vince Martin has no positions in any securities mentioned.
