Snap (NYSE:SNAP) stock has been one of the biggest high-profile tech initial public offering (IPO) disasters in recent memory. After a highly anticipated 2017 market debut at an IPO price of $17, SNAP stock promptly took a swan dive as growth numbers eased and an app redesign prompted outrage among users.
SNAP stock hit an all-time low in December at $4.82, but since has rebounded to above $9. A big portion of that move came after SNAP reported better-than-expected earnings earlier this month.
But while SNAP may finally be getting its business back on track, traders should consider taking profits on the red-hot stock while the getting is good.
Snap Is Still Losing
SNAP is up 30% in February alone. That kind of bullish move is what traders could expect from a stock that is generating massive profits and dominating its industry. The reality for Snap is much different.
Snap’s Q4 earnings report could most accurately be described as “better than feared.” Snap shares ripped higher because revenue grew 36% and average revenue per user was up 37% to $2.07. Both those numbers were better than expected, but the rest of the picture is still pretty ugly.
User growth was essentially flat compared to Q3 and actually down 1 million users from a year ago. Perhaps most importantly, Snap reported yet another quarter in the red, losing an adjusted 13 cents per share.
Once upon a time, Snap investors were free to ignore the fact that Facebook (NASDAQ:FB) was beating the socks off of Snapchat in terms of monetizing its user base. Snap investors argued that Snap’s growth profile and its popularity among younger users, particularly North American teens, made it a unique opportunity for advertisers.
Unfortunately, Facebook has out-Snapchatted Snapchat with its extremely popular Instagram platform.
Not only does Instagram Stories have more than 150% more daily active users than Snapchat, eMarketer recently estimated Instagram’s average revenue per user at around $4. That rate is double Snapchat’s ARPU. The Facebook platform’s ARPU as of Q4 was even higher at $7.37.
Snap Stock Has Too Much Uncertainty
Guggenheim analyst Michael Morris recently said there are at least three major near-term questions keeping him on the Snap sidelines. First, as the numbers mentioned above suggest, it’s uncertain whether or not Snapchat will ultimately be able to compete with Instagram.
“Instagram is an inevitable share taker given its funding and engineering resources,” Morris said.
Second, Morris said Snap needs a home run with its Android rework. Android devices account for 88% of global mobile minutes. Unfortunately, Snapchat’s global Android penetration rate is still in the single digits.
Finally, as the ARPU numbers indicate, Snap needs to gain traction with its ad pricing. Domestic advertising revenue has trended higher for Snap in each of the past four quarters. However, that number will have to continue moving in the right direction for a long time before Snap is generating meaningful profits.
Snap Stock Is Expensive
As a value investor at heart, I never like to see any company generating negative earnings. However, for high-growth stocks like Snap, price-to-sales ratio can be a stand-in for price-to-earnings ratio.
Unfortunately, after the recent rally, SNAP stock is trading at about 6.6 times Guggenheim’s estimated 2020 revenue. The obvious first comparison is FB stock, which is trading at just 5.7 times 2020 sales estimates.
Other digital media stocks, including Netflix (NASDAQ:NFLX) (6.2 times 2020 revenue), Twitter (NYSE:TWTR) (5.9 times 2020 sales), Alphabet (NASDAQ:GOOGL) (4.0 times 2020 sales) and Roku (NASDAQ:ROKU) (4.2 times 2020 sales) are all cheaper than Snap at the moment. The same pattern holds true when looking all the way ahead to 2023. SNAP stock is simply expensive.
Takeaway
Snap is not profitable. Its user growth has stagnated. Its stock is more expensive than its more successful peers. It’s ad business is less efficient than Instagram’s, it’s losing market share and it has several key operational hurdles to clear in the near-term.
Yet despite all these negatives, traders can cash out a 30 percent gain since Feb.1 or a 60 percent gain since Jan. 1. In my opinion, they should do just that as soon as possible.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.
