2017-03-16 / Top News

So far Snapchat is a one-trick pony, so be cautious before investing

MONEY & INVESTING

A number of people have asked me about my opinion of Snap Inc.’s IPO. For those not following financial markets, the parent company of Snapchat went public on March 2 with a very strong demand for the new stock. Because of this, the stock was priced above its expected price of $14 to $16, at $17 per share. SNAP opened at around $24 and by Friday it was trading above $27. So at this price, is this a good stock to buy?

To answer this question, I think it would help to examine what makes a stock price move. Ask a typical investor and her answer would probably be good news or bad news. If a company reports something positive like good earnings, the stock should move higher. And if it has a negative announcement like poor revenues, the stock should fall.

Actually, this is incorrect. Good news and bad news does not move stock prices. Unexpected news moves stock prices. For example, if a company was expected to post $10 million in losses in a quarter but it actually lost $9 million, that is still bad news. But the stock price actually may go up because the loss was better than expected — it was actually unexpected good news.

So going back to SNAP, at its current stock price the company is valued at $28 billion. It has no earnings (the company lost $500 million in 2016) and no dividend. Even using a multiple of sales, Snapchat’s value is staggering. Twitter is priced at four times sales. Facebook trades at 12 times sales. SNAP is valued at 60 times sales.

So why is it worth so much? Because investors are already pricing good news into the stock. Company sales grew over 600 percent between 2015 and 2016. In order to justify its current valuation, the company must continue to grow at this kind of eye-popping rate. Skeptics point out that slowing user growth, saturation in the U.S. markets, higher expenses and increased competition from Facebook make this unlikely going forward.

Snapchat supporters point to the wildly successful Facebook IPO as an example of a highly valued stock that rewarded investors. And it is true that when Facebook debuted as a public company at a frothy 24 times sales, many analysts said that the company was completely overvalued. But those analysts were proved wrong when the company went on to rise from its offering price of $38 to over $130 today.

But what people may have forgotten was that Facebook not only rewarded investors with good results over the past few years but unexpectedly good financials. When the stock went public in 2012, the company had a significant user base just like Snapchat. But many investors were worried because users were using Facebook on their home computers but mobile computing was taking off. They didn’t believe that Facebook would be able to get advertisers to pay big money to advertise on tiny smart phone screens.

These skeptics were clearly wrong and Facebook was able to monetize all of the new tablet and smart phone users. That is why the stock price has grown so quickly over the past couple of years — the unexpected success of its mobile advertising.

So the question now for SNAP is what unexpected positive catalysts are there for the company. If the company just grows as it is expected to, I would argue that it probably is not a wonderful investment as the stock is fully valued today and probably won’t move much higher. And any revenue/user slowdowns, insider selling, or other negative surprises could destroy the stock as seen with a similar company, Twitter.

So the only way the company, in my opinion, is a good investment at this time is if the company can do something that the market is not anticipating. So far, the company has been a one-trick pony, so I don’t see that creativity in the near future. Therefore, before investing in this new stock, I would first wait until the lockout period ends and insiders can begin to sell their stock. This should put near term pressure on the stock. And second, I would wait until the company demonstrates it can do something not currently anticipated by the market. Yes, you may miss the bottom of the stock run, but I think the risks just don’t justify the rewards here right now. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for more than 15 years at several global banks.

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