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Why Snap Inc Stock’s Disappearing Act Will Continue

Tom Taulli

While the social media industry has been hit with lots of terrible headlines lately — such as with privacy and data protection — the stock prices of some of the major players have held up. Facebook, Inc. (NASDAQ:FB) has gained 5%, and Twitter Inc (NYSE:TWTR) has returned a sizzling 42%.

But there is one social media company that has been a major loser: Snap Inc (NYSE:SNAP). For the year so far, it is off by 28%. In fact, SNAP stock is down a grueling 50% from its 52-week high. Yes, it’s almost hard to believe that — back in March — it was one of the hottest IPOs in tech.

Yet the public markets can be brutal, especially for companies that continue to underperform and miss their numbers. And as for SNAP stock, there have been mostly negatives.

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Despite all this, might there be a play here based solely on sentiment? Hey, can things really get any more pessimistic? Maybe even a couple pieces of good news may get things bullish again?

Perhaps so. It’s important to note that SNAP stock is heavily shorted. Note that about 30% of the float is in short positions. This means that if there is a move to the upside, it could be supercharged, as short sellers will be forced to cover their positions.

However, I think such moves are likely to be short-lived. The fact is that SNAP stock has serious fundamental issues, which will take quite a bit of time to fix.

First of all, the company continues to burn an alarming amount of cash. During the latest quarter, EBITDA dropped from -$188 million to -$218 million, and free cash flows went from -$173 to -$268 million. It actually seems like Snap is somehow gone back into a time machine to 1999!

Next, there is the continued pressure from FB. For the most part, it looks like Mark Zuckerberg wants to stamp Snap out of existence. The main platforms for this assault include Instagram and WhatsApp, which are growing much faster.

This is actually a head-scratcher since Zuckerberg hasn’t created any breakout features. Instead, the strategy has been to clone Snap. But then again, Zuckerberg has been skillful in focusing on the right features — and providing some improvement to the ones he snags!

Of course, Snap has recently undergone a redesign of its app, and the results have been, well, kind of disastrous. This has likely dented the user growth, which saw a mere 2% sequential increase during the latest quarter. This translated into four million new users for a total of 191 million. Yet Wall Street was looking for 194 million.

Bottom Line on SNAP Stock

Even with the drop in SNAP stock, the valuation is still far from cheap. Consider that the shares trade at a nose-bleed 17 times sales. This is a hefty premium for a company that is experiencing lagging user growth and decelerating sales. By comparison, FB stock trades at 12X, and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) is at 6X.

Besides, when a social network starts to fizzle out, it can be an enormous challenge to get things back on track. Just look at the struggles of companies like Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA).

Now this is not to imply that SNAP stock will never be a good buy at some point. It’s true that the company has a strong brand with younger demographics — which is a category that is difficult to target — and the engagement remains high. Although, for those looking at a purchase, it’s still probably best to wait until the valuation gets more reasonable.

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Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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