My attitude toward Snap Inc (NYSE:SNAP) has remained relatively consistent in the year-plus since Snapchat stock went public. Snap Inc is losing money — which is fine. It’s an early-stage growth company, still learning how to market its platforms to advertisers and users. Even considering that fact, however, SNAP stock consistently has looked too expensive.
Thirteen months after the IPO, that’s still the case — even with SNAP stock trading 14% below its IPO price. Snap Inc as a company hasn’t had an awful run. Indeed, fourth quarter earnings in February sent SNAP soaring. But I wrote soon after that I didn’t think the gains would hold and, indeed, Snapchat stock has come back to Earth, falling by almost one-third from post-earnings highs.
There’s been some bad news of late, to be sure. Celebrities are ditching the platform (or threatening to) after a much-maligned redesign of the Snapchat app. The market seems confused by recent layoffs. But, more broadly, the story isn’t all that different from what it’s been for over a year now.
Snapchat is growing, should eventually be profitable, and is likely to find a niche in the social media/messaging space. But it’s still not worth paying what the market is charging.
The Snapchat Redesign
Snap Inc redesigned its app back in November — and the changes have caused friction with the user base. In trying to expand its user base to older consumers, Snapchat apparently has upset its existing base. Over one million users signed a petition to roll back the changes. SNAP stock tanked when Kylie Jenner threatened to leave the platform. Chrissy Teigen — who had over 10 million followers — did leave, in part due to a questionable advertisement.
Whether Snapchat is trading short-term pain for long-term gain remains to be seen. It’s not as if the company’s user growth was all that impressive to begin with. As I’ve pointed out before, Snap DAUs (daily active users) rose 18% year-over-year in 2017. For Twitter Inc (NYSE:TWTR), a larger and much more mature platform, the figure was 12%.
Snap needs user growth to accelerate — which made the redesign worth the risk. And the de-emphasis on celebrities and news provides a counterpoint to Facebook Inc (NASDAQ:FB), as Snap Inc CEO Evan Spiegel implied in announcing the changes.
First quarter results, due in the next couple of weeks, will give the first data point as to the impact on Snapchat’s user base. So far, the news appears negative, and the pressure of the changes no doubt has contributed to the pullback in SNAP. Some patience is advised — it’s still possible, that in the long run, Spiegel’s vision will be validated.
Layoffs?
Meanwhile, a series of layoffs at Snap Inc also have spooked the market. That might seem counterintuitive. Layoffs generally save money — and help earnings. Often, companies see their stocks rise after announcing workforce reductions. (Major layoffs by General Electric Company (NYSE:GE) in December, for instance, were seen as the company getting its costs under control, though they did little to help long-suffering GE stock.)
But, again, Snap isn’t supposed to be profitable yet. Its engineering team still needs to add useful and exciting features. Its sales team still needs to bring major advertisers on board, particularly overseas. Average revenue per user in 2017, per the company’s 10-K, was $2.75 per quarter in North America. The figure was just 66 cents in Europe and 56 cents in the rest of the world.
So, as an analyst has asked, why is Snap cutting expenses now? Revenue growth is the most important issue for SNAP stock going forward. Saving $30 or $40 million a year doesn’t materially change an Adjusted EBITDA loss of $720 million in 2017. The company has over $2 billion in cash on the books; it’s not going bankrupt.
On its own, the layoffs aren’t that big a deal. But combined with the response to the redesign and Snap’s forays into Spectacles, they raise a broader strategic question. Where is Snap Inc headed? What kind of company does it want to be? And how well is it really going to execute during a critical phase in its growth?
SNAP Stock Still Could Be Cheap
There are real concerns here, concerns that have undercut the post-fourth-quarter optimism. But from a broader perspective, I can still see some reason for optimism toward SNAP stock. There are huge opportunities available to the company to boost revenue per user, particularly overseas. Users are growing, if slower than investors would like. The Cambridge Analytica scandal and advertiser worries about online placement both could benefit Snapchat long-term.
But SNAP just isn’t cheap enough. The stock still trades at about 7 times 2019 revenue, even backing out net cash. That’s not a huge multiple in this market — Square Inc (NYSE:SQ) and Shopify Inc (NYSE:SHOP), among many others, trade at even higher valuations.
But those companies at least are profitable — and, in some cases, growing faster than Snap Inc. For Snap, profitability probably isn’t coming until 2020 at the earliest. User growth isn’t good enough. Add to that strategic questions and an ugly chart, and it’s too tough to get excited.
Snap still has a chance to prove its value — but it’s going to take some time and some notable improvement on key metrics. As such, there’s no need to rush in until SNAP gets much cheaper or it begins to show real progress.
As of this writing, Vince Martin has no positions in any securities mentioned.
