Despite Price Decline, Snap Still No Bargain
As we head into earnings season, we thought to highlight Snap (SNAP) and the difficulty it continues to have in maintaining a network effect and a competitive advantage over wide-moat Facebook (FB). The weakening of Snap’s network effect was already evident in its first-quarter results as year-over-year growth in daily active users, or DAUs, decelerated further for this young company. Regarding the second quarter, our further tempered DAU growth expectation for the firm got some support as Facebook boasted that its Instagram has 250 million DAUs in late June, which we estimate represents 17% average monthly growth during the last nine months. For Snapchat, we expect that figure to have been only around 3% at the end of the second quarter.
Instagram’s user growth, which appears to have come at the expense of Snapchat’s, is likely driven by Snapchat-like features such as Stories, disappearing messages, lenses, and the latest selfie filters. Additionally, Facebook recently announced its monetization plan of the Messenger app via display ads, which now are being tested. In our view, this could grab the attention and some ad dollars of advertisers away from Snapchat.
Lastly, Snap’s IPO lock-up expires in late July, which could push the stock down further in the short term. We launched coverage on Snap one day before the company’s IPO with a valuation below the firm’s IPO price. Since Snap’s first day as a public company, its shares have declined 37%, and are down 47% from a year-to-date high of $29.44. While Snap is now trading below its $17 IPO price and at nearly a 5% discount to our $16 per share fair value estimate, we continue to recommend a wider margin of safety before investing in this no-moat and very high uncertainty name.
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