Snap (NYSE:SNAP) announced third-quarter results Oct. 22 that were reasonably strong. In the three weeks since, though, SNAP stock has mostly tread water.
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If not for Spectacles 3, Snapchat stock would be sitting pretty. Let me explain.
Snapchat’s Spectacles 3 augmented reality glasses went on sale on Nov. 12 at $380 a pop. When they did, even tech-friendly sites such as Techcrunch questioned the sanity of such a purchase.
“Spectacles 3 are too expensive to be a toy, but don’t excel at being much more,” Techcrunch’s Josh Constine wrote. “Videography influencers might enjoy having a pair in their tool bag, but it’s hard to imagine anyone not sharing content professionally paying for the gadget.”
Even CEO Evan Spiegel doesn’t foresee augmented reality glasses being adopted en masse by consumers for at least a decade.
So, why bother? Why not just keep perfecting prototypes that remain under lock and key until that day arrives?
Six letters that spell V-A-N-I-T-Y.
In August, I addressed the subject of Spectacles 3.
“Until it’s generating positive free cash flow, investors ought to be suspicious of vanity projects such as this one. They’re a waste of time, resources and focus,” I wrote. “While I still believe Snap stock could still hit $20 in 2019, the company’s insistence on maintaining the Spectacles business portends a potential correction in 2020.”
As I reminded readers, Spectacles 3 is a project for a company of Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) size and profitability. It can afford to blow a few hundred million on something like a pair of AR glasses.
Snap, most definitely, cannot.
Setting the Table for 2020
There’s no question a 163% return year to date through Nov. 14 is an excellent showing. As I write this, the SNAP stock price is within $2.50 of its March 2017 IPO pricing. In July, it actually pushed through its $17 IPO price, only to lose most of its momentum come the fall.
With just six weeks left on the calendar for 2019, I doubt it can rally to $20, something I pondered earlier in the year, suggesting it was “one of the more intriguing low-priced bets available in today’s market.”
In early October, I discussed some of the reasons that Morgan Stanley analysts liked Snapchat stock.
At the time, the average target price amongst analysts covering SNAP stock was $17.62. Five weeks later, the target price has inched up 39 cents to $18.01. More importantly, the number of “buy” ratings has grown to 15 from 12 with no sell recommendations, just one at “underperform” and 23 sitting on the fence with a “hold” rating.
One of Morgan Stanley’s arguments for SNAP stock is the fact that the bank’s analysis has continued to underestimate the job Spiegel and company have done delivering financial and operational discipline, the kind that demonstrates it has a pathway to profitability.
That pathway is by continuing to chip away at the number of daily active users (DAUs) it has at the end of each quarter.
As Snap said in its Q3 2019 report, the social media platform’s DAUs were 210 million at the end of September, seven million higher than in the second quarter, and 24 million higher than in the same quarter a year earlier.
That’s sequential and year-over-year growth of 3.4% and 12.9%, respectively. Not bad for a company that was on the ropes in 2018.
The Bottom Line on SNAP Stock
For Snapchat stock to get to $20, in addition to adding DAUs each quarter, it’s got to convince more investors that it’s stopped the bleeding and turned a corner.
While I wouldn’t say it’s there just yet (it still lost $244.5 million on an adjusted EBITDA basis through the first nine months of the year, a 53% decline) the company has made a lot of progress.
In fact, for all the disappointment about revenue guidance for the fourth quarter, it’s hard to ignore that Snap could make money in the final quarter of the year.
Even though Snap lost momentum in 2018, I sense Evan Spiegel has figured out how to get more out of the business in terms of sales without spending more to get those sales. It’s critical it continues on this path if it wants to get to $20.
I expect SNAP to head into 2020 with some momentum behind it. I just wish it would get rid of the glasses.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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