On Wednesday, I let you know why your dream-catching portfolio that you’re building should never have APRN in it.
Today, I’m warning about another recently launched wannabe highflier IPO that crashed. Though it may look like a bargain now, it’s just another gambler’s stock and not a portfolio candidate.
I’m talking about Snap Inc. (NYSE:SNAP), parent company of the app Snapchat.
Here’s why SNAP will never be worth a gamble…
Everything That’s Wrong With SNAP
Of course, you’ve heard about Snapchat. But do you know what it is, and what it does?
In the words of Pocket-lint, “It’s the popular mobile app that allows you to send videos and pictures, both of which will self-destruct after a few seconds of a person viewing them. Snapchat is also a fun messaging app. You can capture a photo or brief video with it, then add a caption or doodle or filter/lens over top, and send the finished creation (called a snap) to a friend. Alternatively, you can add your snap to your “story”, a 24-hour collection of all your snaps that’s broadcasted to the world or just your followers.”
By the way, those videos and pictures you send that “self-destruct” can be saved by the receiver, simply by taking a screenshot of them.
But whatever, dude.
The company, founded in 2011, became hot quickly as Snapchat caught on with teenagers.
Facebook liked the app so much it offered Snap’s owners $3 billion for the company in 2014.
They didn’t bite. Instead, they added more users and went public on March 2nd.
Snap’s stock was initially priced at $17 a share, raising $3.4 billion for the company… But they opened trading at $24 per share on the New York Stock Exchange, putting the company’s market capitalization at about $33 billion.
The stock closed at $24.48, up 44%, at the end of its first trading day.
Lately the stock’s been trading between $12 and $13, down roughly 26% from its initial $17 price and down a whopping 58% from its highwater mark of $29.44.
There’s a lot not to like about the company, which is why the stock’s been diving.
To name a few reasons, Snap…
- Loses a ton of money.
- Has a few hundred million dollars of negative operating cash flow.
- Isn’t growing daily users as expected.
- Is totally controlled by its founders, who didn’t give up any voting rights when they sold shares to the public.
- And (lastly, but by every account worst of all) Snapchat’s been copied lock, stock, and barrel by the biggest social media company in the universe, Facebook.
Everything I just said about Snap was common knowledge the day Snap came to market.
To me, that made it a gambler’s stock. I would never have bought Snap on its opening day knowing all that, never. If you thought the stock was going to be a winner, you were right for about a New York minute.
Now, not so much.
Neither a Snapchatter Nor a Gambler Be
The first rule of thumb about investing for your future and finding homerun stocks is to buy into companies whose products and services have an ever-expanding audience of potential customers.
While Snap looked like it could expand into the universe, it was facing a black hole. How is Snapchat, with currently about 166 million daily active users, ever going to own the space when Facebook with its Instagram and Snapchat copycat apps have more than 2 billion average monthly users, 66% of whom are daily users?
That alone takes the life out of Snap and eliminates it from any consideration of being a potential portfolio holding for anyone serious about building wealth and retiring rich.
On top of that, there’s a heavy load of sidelined stock (initially $400 million-worth, now totaling a whopping $1.2 billion-worth), that’s being released from lock-up. That could hit the market in the next couple of days and weeks, and early investors, founders, and employees might want to sell as they watch the stock – and their wealth – slide with it.
Is Snap a “bargain” down here, like some analysts are saying Blue Apron is, after it fell 35% from its May 2017 IPO?
No, Snap’s no bargain. But the stock could pop if their August 10th earnings surprise to the upside.
BAML analysts are looking for Snap to add 10 million active daily users, taking them to more than 176 million, which would be a 23% year over year increase. Daily users, of course, are a proxy for future revenues. They expect a 24% revenue per user increase… That’s huge. And they have a $20 price target for the stock.
Of course, if Snap’s earnings disappoint, or if revenue falls, or if the number of average daily users doesn’t grow as much as expected, or if the loss per share is greater than the 30 cents projected, then shares will sink and all those stockholders on the sidelines will unleash their sell orders.
Snap’s a gambler’s stock.
If you’re a gambler, have fun. You might get a nice ride buying down here if the stock pops.
But if you’re creating wealth and if you’re building a retirement portfolio that will give you the freedom and cash to live your life in luxury, avoid Snap and its disappearing apps as if they’d disappear with your money.