SNAP Inc. (NYSE:SNAP)
To say that the recent IPO of Snap Inc. (NYSE:SNAP) has received attention from the financial media is a bit like saying that President Trump’s tweets sometimes generate discussion amongst the press. Snap Inc. is the third social media IPO, after FaceBook and Twitter, to generate such an abundance of hype that it demands an answer to the question – is SNAP worth the price? This is a question with a binary outcome – each expert’s opinion has a 50/50 chance of being right. Most experts have come to the conclusion that it does not citing current valuations, daily average user numbers, and growth rates of just about every imaginable metric. We agree that Snap Inc. (SNAP) is a reach at these prices. Did I say “a reach”? Let’s be clear – it’s more like one of Elon Musk’s moon shots. We’ll review some of the valuation and growth data then we’ll bring some common sense into the discussion.
First, thanks to FinViz.com, this is what the shareholders of Snap Inc. (NYSE:SNAP) hope the stock will look like in a few years:
This above monthly chart is for FaceBook. Its current valuation is over $395 Billion.
Now let’s look at Twitter. This is what Snap Inc. (NYSE:SNAP) shareholders hope the stock performance will not look like in a few years.
Twitter’s current valuation is $11.5 billion. It was worth $40 billion at the end of 2013. Twitter hit its all-time high the second month it was trading and is now trading almost 80% below that mark.
After Friday, Snap Inc. (NYSE:SNAP) has a market capitalization of over $28 billion. That market cap means that SNAP is trading at over 60 times its 2016 revenues and over 32 times projected 2017 revenues. In 2015, Snap Inc reported a loss of $325 million in daily cashflow that expanded to a loss of $677 million in 2016. However, as most financial professionals understand, growth usually kills all concerns about oversized valuations.
In Q2 2016 Snapchat had 65% growth in their daily average user base that shrank to 40% in Q4 of last year. That drop in growth figures is what worries most investors that SNAP may be more like TWTR than FB. The model that was part of the SNAP roadshow put 2019 active daily average users at 400 million. By the end of 2016, SNAP had about 50% more daily active users than at the end of 2015. We know from Twitter’s experience that growth rates often have a ceiling and there is nothing to suggest that SnapChat is immune to that. Whether it will be immune to Instagram’s efforts to challenge it in its own space is an open question and one that only the market can tell us after the outcome if relatively clear.
Users of SnapChat generate ad sales, which are responsible for over 95% of the revenue. The issue that advertisers have is that the 10-second video ads can be swiped away by the person viewing the user’s story. But how does SnapChat compare to Instagram – who they will absolutely be competing with in terms of ad dollars? Advertising Age related that a Nike ad buy got 66,000 views on SnapChat. But on Instagram the same ad got over 800,000 views. Instagram has a larger user base – double that of SnapChat. But in this single example, Instagram outperformed for their advertiser by a factor of 12!
Snap Inc. (NYSE:SNAP) likes to point out that their user growth metrics outpace either FaceBook or Twitter. True enough. However it is also true that the barrier to adoption of a new social media platform has lowered due to the acceptance of those same social media channels. As younger generations become a larger segment of the social media universe, adoption barriers lower as the younger generation are eager to be “first-adopters”.
And that is really where we come down against buying SNAP at these levels. It is easy to make the case that in 5, 10, or 20 years SnapChat will be a mature company with a massive user baser generating huge revenues. However, in our opinion, investors will have to wait until the younger generation grows into the demographic that actually has some disposable income to spend on the goods or services that SnapChat will be advertising. A quick survey of my friends, family, and their kids found that over 90% of the active SnapChat users had no income. Eventually they will and that will be the tipping point at which shares of Snap Inc. (NYSE:SNAP) might become more attractive.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 96 hours. All information, or data, is provided with no guarantees of accuracy.
About the author: Marc has a degree in economics and a MSc. in Finance. Over his 20-year career, Marc has worked for global investment firms in Europe and the United States as an analyst, fund manager, and consultant.