According to some Wall Street bigwigs, there are plenty of reasons to own Snap Inc. (NYSE:SNAP), the creator of Snapchat, which went public yesterday….
Those bigwigs, by the way, aren’t analysts, but the underwriters of Snap’s IPO…
Morgan Stanley and Goldman Sachs just pocketed a cool $20 million each (and counting) to debut the company.
Good cheerleading on their part, and the rest of Snap’s underwriters (J.P. Morgan, Deutsche Bank, Barclays, Credit Suisse, and Allen & Co.) will drive up Snap’s price. This will allow them to exercise a “greenshoe” option to sell an additional 30 million shares – for more fees, of course.
None of these Wall Street heavyweights have initiated analysts’ coverage of Snap, and probably won’t for a while. Or, to be perfectly honest with you, ever.
If the reasons to own Snap come from underwriting cheerleaders, who aren’t going to let their analysts cover it, you need to know the real score… and the reasons underwriter’s analysts won’t ever cover Snap.
Who Really Profits From Pumping Up Snap
Snap calls itself a “camera company,” which is strange and self-defeating if you think about GoPro Inc. (NASDAQ:GPRO) and what a mess that stock is since going public. After debuting near $30 and getting quickly to nearly $100, GPRO’s trading near $10 now.
Snapchat, Snap’s only product that makes money (I’ll get to that), is a camera app that allows users to add funny features to their pics, send them and have them supposedly disappear.
This camera company’s users are under 30 years old. That’s a problem for the company on two counts:
- Young people get tired of apps and move on, especially if they become too “adult” or if too many adults embrace them.
- As these youngsters grow up, they’re not going to be as inclined to send silly pics to their maturing friends. So the target audience for Snapchat is limited.
That’s already showing.
While Snap says fourth-quarter 2016 average daily users was 158 million – a 40% increase from the daily user count in the fourth quarter of 2015 – sequentially, the growth of users from the third quarter of 2016 to the fourth quarter of 2016 was… pretty much none. Ouch.
Meanwhile, this past August, Facebook’s Instagram launched its own version of Snapchat’s popular ‘Stories’ feature. Instagram’s version of Stories, which it also calls Stories, has 150 million average daily users already! And, while Snap’s been preparing for its IPO, Facebook’s been launching another Snapchat-like product on WhatsApp, which has a billion users in 180 countries. Ouch, again.
Don’t expect Snap to turn a profit soon. It’s losing money hand over fist, even as its revenues pop.
Snap’s 2016 revenues rose from $59 million in 2015, to $404 million… a whopping 585% increase. Still, the company had a net loss of $515 million in 2016. It’s burned through more than $1 billion in the past two years. Even more ouch.
In Company filings for its IPO, Snap had to tell potential investors it doesn’t know how soon “or, if ever” it can become profitable.
Evan Spiegel, Snap’s co-founder said, “We built our business on creativity, and we’re going to have to go through an education process for the next five years to explain to people how our users and that creativity creates value.”
If you can wait five years to see value in the company, good luck with that.
The co-founders, however, don’t have to wait. Spiegel and Murphy sold $272 million worth of stock each in the IPO and are each worth billions on paper.
There’s always a lot of hype about a tech IPO, especially this one, which is the biggest since Alibaba Group Holding Ltd. (NYSE:BABA) in 2014.
But Snap ain’t no Alibaba, and it certainly ain’t no Facebook either.
Like Twitter Inc.‘s (NYSE:TWTR) IPO in 2013, Snap’s IPO is a success as of today.
However, remember that while Twitter soared 73% in its debut, Snap rose 44%. Twitter got to a high of $74, but today trades around $15.75. Twitter’s a one trick pony, like Snap, only its user base is still twice what Snap has and boasts users of all ages (including the President of the United States, for better or worse).
Snap is valued currently at three times Twitter’s present market value. It IPO’s at more than twice the price-to-sales ratio sported by Facebook today.
Really, does that make sense?
Not Worth the Hype
As far as the hype, the IPO was successful in the face of serious worries because it was widely spun that IPO shares were ten times oversubscribed. That says to the uninitiated that whatever demand there is for Snap shares that would allow it to open at $17 a share, there are actually ten times that much demand.
You’d think, “Holy cow, that’s hot!” But it’s not.
Being ten times oversubscribed simply means people put in orders asking for ten times what they wanted, because if they put in for what they wanted they might get a tenth of that. That’s all that means in this IPO.
As far as analysts on Wall Street willing to comment on Snap, here’s what a few actually said:
Susquehanna’s Shyam Patil said:
- Euphoria could cause short-term disconnect between fundamentals and valuation; “longer-term we struggle to see SNAP as an investment with meaningful upside potential from current levels”
- Current price of $24 could leave room for near-term upside potential given heightened level of interest; stock could reach high $20s to low $30s
- Neutral, PT $22
Atlantic Equities’ James Cordwell said,
- Trading at a premium to Facebook after normalizing for engagement levels; valuation unsustainable given unproven monetization potential, lower profitability, likely challenges in materially reaccelerating user growth
- $24/share values stock at 15% premium to Facebook on EV-to- time spent basis; effectively implies Snap will be able to better monetize its engagement than FB
- Downgrades to underweight from neutral, PT $14
Aegis’ Victor Anthony said,
- Snap trades at 31.7x Aegis’ 2017 sales est. vs 9.8x for Facebook and 4.0x for Twitter
- Bull-case model sees fair value of $34, bear case points to $12
- Hold, PT $22
Nomura Instinet’s Anthony Diclemente said,
- Already-slowing growth in daily active users, monetization limit Snap’s upside
- Also cites fierce competition from larger rivals, rich valuation; rev. opportunity constrained relative to expectations, shares fairly valued, at best, at the $17 IPO price
- Reduce, PT $16
Pivotal’s Brian Wieser said,
- Likely scale of long-term opportunity, execution risks, dilution from share-based compensation represent negatives
- Promising early-stage company with significant opportunity ahead is “significantly overvalued”; risks include aggressive competition, core user base not growing by much, “sub-optimal” corporate structure, high expenses, cash costs
- Sell, PT $10
(PT means their price target.)
My prediction: the stock could go a lot higher, and I hope it does. Especially if it rises because the market rally takes it higher.
Then, at some stupid price (stupider than where it is now), I’m going to short-sell the you-know-what out of this pig.
I’ll let you know when.