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Snap: Reality Is Slowly Setting In

- By Harsh Jain

I have been advising investors against taking up a long position in Snap (SNAP) ever since the company went public. Although Snap had a great IPO, with shares rising almost 70% from issue price of $17, the euphoria seems to be dying now as the stock is down almost 30% from its highs and is currently trading at $21, falling under the post-IPO level.

While reality may be setting in in the market, Snap is still trading in bubble territory and I think investors should still sell the stock as it could head lower to as much as $10. Notice the lack of positive coverage and the growing list of negative and neutral standpoints has played a huge part in bursting the bubble, and with Snap's valuation still being too high, I think the downtrend will most likely continue in the weeks to come.

As of now, Snap is a great stock for traders, but no so much for long term investors. I don't think anyone can make a compelling bull case for the stock, but shorting it can also turn out to be a risky bet.

More near-term downside?

It was recently reported that 43% of Snapchat users bought their way into Snap's IPO. Given that Snap's user base mainly comprises of teenagers and Millennials, it is highly likely that many of those people did not make an informed decision and bought the stock because of the hype and their bias for the product.

I was not expecting Snap to fall as rapidly as it did, however, with the momentum having shifted already, I believe investors should stay away from the stock. I would recommend shorting the stock at current levels, however investors can't short the stock for 30 days after it has gone public.

So, I there's not really much of an option for people looking to bet against Snap. However, despite the recent drop, I don't think there's still a good reason to buy the stock, so I would recommend investors to sell the stock and watch it from the sidelines.

Summing Up

While I am bearish on Snap, there isn't for investors to profit from it. Hence, under the present scenario, I think the best thing that investors can do is sell the stock and watch it from the sidelines till the time shorting it becomes an option.

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

This article first appeared on GuruFocus.