At What Price Is Snap a Buy?
- By Jonathan Poland
Similar to Facebook (FB), where Mark Zuckerberg controls close to 60% of the votes, Snap Inc. (SNAP)'s co-founders, CEO Evan Spiegel and Chief Technology Officer Bobby Murphy, control close to 90% of the votes.
There's literally nothing that shareholders can do to get these guys out, and none of them should want to either. Evan is 28 years old. Bobby is 30. We're talking about a technology company that went public just last year. But fast forward 18 months, and the stock is down almost 80%. It's time to sound the alarm.
Warning! GuruFocus has detected 1 Warning Sign with SNAP. Click here to check it out.
The intrinsic value of SNAP
The latest drop was in response to declining daily active users and a cash burn of $159 million a quarter. Yet, from a purely numbers standpoint, Snap is losing less money and revenue is still climbing, posting $298 million in the latest quarter, up 43% year-over-year. Just remember where Twitter was not long ago, and by many estimates Snap still has over 186 million daily active users (up 4% year-over-year), more than enough to keep it moving in the right direction financially. If Snap can extract the same amount per user that Facebook does, it could eventually generate close to $4 billion in annual sales.
The problem is that Snap bills itself as a camera company.
"We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate. We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together," the company's materials state.
This seems problematic as nothing could be further from the truth. Snap should be focused on technology, not camera functions. Looking at the job openings at the company, engineering leads the way. In reality, Snap is a media company that uses its user base to engage with their audiences and sell advertising.
In fact, earlier this month Snap announced 12 original shows, tailor-made for mobile, that will be less than five minutes long. This has to be in response to what made the app popular in the beginning, quick photos for young people. Eventually, those young people grow up, but their habits around fast-paced content consumption will remain intact. At least that's what Snap is betting on.
This is still a money loser. Yet, the $1.5 billion in cash gives Snap a lot of runway to get off the ground and not crash. Valued at $8 billion could put it on other technology company's short list for acquisition. There are certainly other technology stocks priced at higher valuations, making Snap's 7.4 price-sales ratio and 3.4 price-book ratio look pretty good, actually.
This is one of the better flyer stocks available in the market because of the two co-founders and the captive daily audience, which could be sold almost anything. As long as mobile phone usage remains high (and it should), Snap offer investors at this price the opportunity for massive upside.
Disclosure: I am not long/short any stock mentioned in this article.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 1 Warning Sign with SNAP. Click here to check it out.
The intrinsic value of SNAP
