U.S. Markets closed

Financial, Competitive Headwinds Will Catch up with SNAP Stock

Will Healy

Snap (NYSE:SNAP) stock has spent most of 2019 recovering losses it has sustained since its 2017 IPO. With the SNAP stock price at just above $13.60 per share at the time of this writing, it continues to march toward the $17 per share IPO price from two years ago.

snap stock

Source: Shutterstock

Deals to boost user engagement and more ad sales have boosted the prospects for Snapchat stock.

However, the company continues to face competition from more prominent players. With losses expected for several more years, SNAP could stop moving higher if attention shifts back to the company’s stagnant user growth and financial losses.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

SNAP stock price has risen by more than 150% since the start of the year. Investors began to feel more confident about the company as it adopted the ad-based approach that has helped peers such as Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR).

Thanks in part to this new approach, analysts predict a 34.8% increase in revenues this year and 30.4% in fiscal 2020.

Also, Facebook’s decision to not move forward with Direct, an Instagram app for messaging that would have competed directly with Snapchat, boosted the stock further.

Financials Are a Problem

As I stated in a recent article, saving Snapchat does not equate to rescuing SNAP stock. SNAP’s daily active user (DAU) numbers have again begun to rise.

Unfortunately, at 190 million, DAUs remain below the company’s record 191 million daily active users from the first quarter of 2018.

The financials indicate the market may not “rescue” the equity further. Even if the company can sustain its positive direction, SNAP trades at more than 14 times sales. Despite the improvements, analysts also forecast losses through at least 2022.

Assuming this forecast can hold, carrying the company forward will mean pain to the balance sheet. As of the previous quarter, the company holds about $1.2 billion in cash on its balance sheet. This comes in just under the company’s 2018 losses of just over $1.25 billion.

This presumes that the company can sustain its current pace for almost a year before it must turn back to the debt or equity markets to raise more cash. At that point, the company may have to resort to share dilution, which of course weighs on the price of SNAP stock.

Share issuance is not something new for SNAP stock. The number of outstanding shares rose by 5.48% on a year-over-year basis as of the end of the first quarter.

Still, every year has seen double-digit increases in shares available. In 2017, available shares rose by 44.34%. Unfortunately for SNAP bulls, the higher stock price increases the incentive to increase share issuance.

Snap’s Management Problems

Another issue speaks to the concern my colleague Laura Hoy addressed in her article. Admittedly, the concerns she addresses build a compelling case for not trusting the company’s management. She cited the decision to not hold an in-person shareholder meeting as one reason for this mistrust.

A lack of specifics on the balance sheet reinforces this concern. On that statement, Snap declines to itemize non-current liabilities. Hence, we have no information on the company’s debt.

We do know that “other long-term liabilities” rose from $110 million at the end of 2018 to $337 million.

If that is all long-term debt, that would not constitute a huge liability for a company with over $2.16 billion in stockholders’ equity. Specifically, this gives management the option to address some of the losses with more debt.

However, the lack of willingness to state this directly could further breed a lack of trust. Such sentiment bodes poorly for Snapchat stock bulls hoping that the rally will continue.

The Bottom Line on SNAP Stock

The rally in SNAP could end if investor attention returns to the user numbers and the financials. Snapchat stock has moved much higher in 2019 on ad sales and new alliances.

Unfortunately, analysts do not expect these moves to make SNAP profitable.

The higher stock price could lead to more share issuance. While the company could also address these shortfalls through debt, a lack of transparency about financials or shareholder-related issues could breed mistrust at a time when Snapchat needs to build investor confidence.

It is likely just a matter of time before these concerns catch up with SNAP stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

More From InvestorPlace

Compare Brokers

The post Financial, Competitive Headwinds Will Catch up with SNAP Stock appeared first on InvestorPlace.