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Snap Has Nowhere to Go But Down

- By Harsh Jain

Snap Inc. (SNAP) went public Friday in what was the biggest initial public offering since Alibaba (BABA). The creator of Snapchat was listed at an initial price of $17 per share but was up over 44% by the afternoon bell. That said, retail investors did not get to ride the rally. After its surge, Snap is now valued at $30 billion, which is not only insane but unjustifiable.

Snap is still a loss making company and has annual sales in the region of $400 million. The current valuation puts Snap price-sales (P/S) ratio at over 80, which is impossible to justify especially since Snap is bleeding money.

It seems like the social media portion of the technology sector is in the bubble territory as the likes of Facebook (FB), Twitter (TWTR) and now Snap command a massive valuation. While the IPO of Facebook has been successful, Snap's future can't be extrapolated from it since the company is still not profitable.

Moreover, the social media boom is coming to an end, which is why paying such a big premium for Snap does not make sense. Moreover, unlike Facebook, Snap's entire user base mainly consists of millennials, which makes it prone to being a fad. Although Snap may have a unique business model, it is not worth anywhere near the $30 billion in market cap it presently commands.

With the social media boom coming to an end, I am certain that there's no chance of Snap ever growing into its current valuation. Not only will the company have to turn profitable, it will also have to report double-digit growth for years to come just to justify its current valuation.

Summing up

I expect Snap to end like Twitter in the long run as the company's growth has already slowed considerably. Various estimates suggest that its growth has slowed dramatically over the past few quarters, highlighting the fact that the company has maximized its growth potential.

With the stock already trading in bubble territory, the slowdown in growth will prove to be disastrous in the quarters to come. While Snap may still seem attractive to its core user base in the years to come, it's highly likely it will fail to attract enough users to grow into its current valuation. Hence, despite the apparent "success" of the IPO, I don't see any reason why a long-term investor would want to buy the stock at current levels.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.