Social media firm and Wall Street newbie Snap Inc (NYSE: SNAP) has been on a roller coaster ride over the past week. Shares of SNAP stock fell more than 20% after the company released a worse-than-expected quarterly report, its first as a publicly traded firm. However just days later, SNAP stock was flying high amid news that several big-name funds had taken substantial positions in the beaten-down stock.
Many investors then chose to follow big names like Fidelity and BlackRock Inc, by adding SNAP to their own portfolios. The surge to buy Snapchat took the stock around 15% higher, with the firm’s share price settling around $20 per share.
While several big funds have bet on SNAP stock’s success, that doesn’t mean casual investors should just jump in with both feet. Not only is Snap Inc a risky play, but the many red flags raised by the company’s quarterly earnings report suggest that investors may want to place their bets elsewhere.
Shaky Financials, No Draw for SNAP Stock
Snapchat’s first quarterly results proved that it’s not easy running a publicly traded company. Overall, the firm lost a staggering $2 billion, but even more concerning was the fact that user growth wasn’t as healthy as most were expecting. While some of Snapchat’s growing pains are to be expected, the user numbers are pretty much non-negotiable.
The company has been able to capture Wall Street’s attention by selling the image of ‘the next big thing’ in social media. Lackluster user growth suggests that the Snapchat trend could be over before it really gains momentum if the company doesn’t find a way to make its service irresistible.
The other worrying thing about Snapchat’s business is that the overall model isn’t entirely convincing.
On one hand, you have an app that has admittedly become a phenomena among young people very quickly. However, the other side of the coin is that the firm has very little to show in the way of future plans. Snapchat can’t coast on as just a disappearing message service, the firm needs some concrete growth plans — something CEO Evan Spiegel hasn’t been able to provide.
It’s important to consider that Snapchat may be nearing saturation in the U.S. market, so there needs to be a plan for expansion somewhere else.
Competition for Snap Inc
Snapchat is definitely giving big names like Facebook Inc (NASDAQ:FB) something to worry about, but so far FB appears to be relatively unscathed.
That’s in large part thanks to Facebook’s shameless copying of Snapchat’s features. While that may not seem like fair fighting, FB’s strategy appears to be working. The firm copied SNAP’s disappearing message format with Instagram Stories, a move that took Snapchat’s quarterly daily active user growth down 82%.
With all of these headwinds, one might think that SNAP is a bargain buy. It’s not. Snapchat was valued at 44 times its expected sales for the next year. That’s an expensive purchase, especially considering investors can buy Facebook stock, a far more stable investment with a diversified business, for just 14.5 times expected sales.
SNAP stock also doesn’t pay a dividend and the firm is unlikely to deliver value to shareholders anytime soon.
The Bottom Line
SNAP stock is risky. Yes, the company has created something that is a big hit among a critical generation. It’s also early days for SNAP, so there is still room for improvement and learning from mistakes.
However, with that said, there are quite a few other places to put your money for the next year while Spiegel and his team iron things out. For now, investors would be wise to invest in SNAP’s better-established peers like Facebook rather than following the herd into Snapchat stock.
As of this writing, Laura Hoy was long FB stock.
