The most high-profile initial public offering of the year — Snap Inc (NYSE:SNAP) — hasn’t been much different than many other IPOs, and not in a good way. See, investors typically can’t get shares at the offering price at the IPO unless they’re wealthy or run a major fund. But here and there, IPOs eventually sink to their offering price anyway — and that’s just the case with SNAP stock at the moment.
Does the low price mean a great value opportunity for investors?
No. Probably not.
SNAP stock faces some major headwinds. Just look at some of the features from the company’s first earnings report as a publicly traded company.
- Top line: While revenues spiked by a sizzling 283% to $149.6 million, it was still was well below the Street consensus of $158 million.
- Bottom line: Snap posted a net loss of $2.2 billion. Granted, this was due in large part to stock-based compensation. But even on an adjusted basis, the loss was 20 cents per share.
- Global daily active users (DAUs): This is the most critical metric for investors in SNAP stock, and unfortunately, the overall trend is not encouraging. In Q1, the year-over-year growth was 36% to 166 million, versus a Wall Street consensus of 167.3 million. To put things into perspective, the prior year growth rate was nearly 100%. Worse: QoQ growth rate was a mere 5%! As seen with social operator Twitter Inc (NYSE:TWTR), a languishing user base is toxic for the stock price.
These issues don’t appear to be temporary. For instance, the Snapchat app is still mostly geared toward a young demographic. Unlike Facebook Inc (NASDAQ:FB), SNAP has not been able to find ways to become more mainstream and reach an older user base. This has limited the growth potential.
Another big challenge is that FB has been relentless with its battle against SNAP. Yes, Facebook’s strategy of knocking off Snapchat features and jamming them into Facebook, Instagram and Messenger feels slimy, but it’s not illegal, and it’s working. One of the biggest success is Instagram Stories, which recently hit 250 million DAUs; the user base was 200 million in April.
If this momentum continues, advertisers will ultimately be less interested in SNAP and focus on a platform (Facebook) with a much bigger audience.
Another thing to consider is that Snap essentially is a one-trick pony. This makes the company particularly vulnerable to competitive threats. There is also the potential for a risk to the user experience. Until a couple years ago, Snapchat was known as a new kind of social network. But then the company abruptly changed its identity, referring to itself as a “camera company.”
Another change may be in the offing, too. SNAP is getting aaggressive with scripted content, as seen with a recent deal with Time Warner Inc (NYSE:TWX) that includes the production of up to 10 shows per year. Will Snapchat instead be a new kind of entertainment operator?
Perhaps, but we don’t know. That’s a problem. Another problem is Facebook is doing the same thing … and leveraging its considerably larger resources to make a big play in this market.
Bottom Line on SNAP Stock
While Snap faces several major fundamental issues, there are also technical factors that investors should keep in mind. The most important is the upcoming lockup expiration, which allows employees and other insiders to unload their positions.
For Snap’s lockout, roughly 60% of the outstanding shares will be available for sale by the end of July. In August, this will jump to 80%.
This doesn’t guarantee an avalanche of selling. But when it comes to IPOs — especially for tech operators that rely heavily on stock-based compensation — there’s typically quite a bit of pressure. According to a report from the Wall Street Journal, the stock prices of TWTR, FB and Linked fell an average of 14% within a week of their lockup expirations.
So in light of this — plus the fact that SNAP stock trades at a nosebleed 39 times sales — it’s probably best to avoid shares for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
