Investors who bought into the hype surrounding Snap Inc. are learning a painful lesson about the dangers of radically overpriced stocks. Snap went public in March and soared 44% on its first day of trading, earning a market capitalization in excess of $30 billion. That strong showing was despite the company's
horrific financials. Snap produced just $404 million of revenue in 2016, along with a net loss of $514 million.
Snap's first quarterly report as a public company was a disaster. Revenue of $149 million marked a decline compared to the previous quarter, average revenue per user slumped 14% sequentially, and the number of daily active users rose by just 5%. Free cash flow was negative $173 million. Unsurprisingly, the stock tanked.
The bad news just kept on coming. Credit Suisse downgraded the stock on Monday, and Morgan Stanley, an underwriter for the company's IPO, followed suit on Tuesday, knocking its price target down to $16 per share. An NYU Stern professor commented on CNBC that same day that investing in Snap "is like driving drunk," claiming that it's "the most overvalued company in the world." While hyperbolic, I don't disagree.
Snap stock has now fallen below its IPO price, tumbling about 40% from its post-IPO peak. Those hoping for a rebound should remember that, even now, the company is valued at an incredible $18 billion, nearly 45 times sales. There is no justification for that valuation. While the stock price will fluctuate, it has nowhere to go but down in the long run.
Just plain crazy
How much is Snap really worth? If you're extremely generous and assign it the same price-to-sales ratio as the uber-profitable Facebook, a little over $6 billion, or just one-third of the current market capitalization. If you instead assign it the same price-to-sales ratio as Twitter, another perennially unprofitable social media company with a stagnating user base, Snap would be worth just $2.3 billion.
One problem that may prove insurmountable: The core features of the Snapchat app are being copied. Facebook's Instagram now offers similar functionality through Instagram Stories, a feature that boasts 250 million daily users compared to Snapchat's 166 million. Snap has been adding more features, including
Snap Map, which allows users to see where people are posting stories nearby. But there's no reason to believe that the larger social media giant won't continue to copy Snapchat's best features.
Evan Spiegel should have sold Snapchat to Facebook for
3 Billion back in 2013. Now its a cautionary tale.