I'll be honest - I never expected to be able to say "I told you so" this quickly. Just 4 months ago, I had a more overarching discussion on Initial Public Offerings (IPOs) and included a brief part on Snap Inc., the parent of the Snapchat mobile app, and how it is an overvalued, risky investment. I also expected it to trend down in share price towards its US$17.00 IPO price and continue going even lower. The initial excitement around the company at the time had the stock soaring and serial Snapchat users becoming first-time investors.
However, since releasing earnings on May 10th in an earnings call and having the lead underwriter downgrade the stock, I thought it would be worthwhile to take another look at what has happened as the stock reacted, touching the $15.00 range and actually trading at less than the initial public offering price ($17.00) for the first time since going public:
Let's start with the current financial snapshot of the company, which has been updated and is readily available thanks to the most recent earnings call. The company's balance sheet lists just over $4.0 billion in assets as of May 2017 and at the current share price, the company is valued at $18.0 billion. These numbers give us an important ratio that describes part of the intrinsic value of a company - price to book value, or P/B. With the current value, the P/B ratio sits at 4.8, which means that for each dollar of assets the company has, each shareholder is paying $4.80 for it. Of those assets, about 10% (or $400 million) are intangible assets classified as goodwill. The company right now does have a low level of debt, which opens up the possibility of obtaining financing at relatively appealing terms to finance capital projects.
Net income last quarter was a very unimpressive -$2.2 billion. That means for the company to break even and not reduce book value even more by next earnings report in August, they would have to magically generate a new $2.2 billion of revenue in a 3-month period. Somehow, I doubt that will happen.
In terms of growth for the company, the number of new active users has seemed to plateau more quickly than what was expected by analysts following the stock. This does not bode well for the company, as revenue will largely have to come from existing users being monetized more and more rather than simply just having a higher number of users. In addition, Instagram has a substantially higher number of daily active users, with features that are relatively comparable to what Snapchat offers. With its better integration with Facebook (as it is owned by Facebook), this could influence the main platform users pick over a longer timeframe. As history has shown, social media platforms typically work in a king-of-the-hill type heirarchy, with the most widely-used platform gaining the lion's share at the expense of basically all small platforms.
Finally, it is important to keep in mind that Snap Inc. shares are still in the "lock-up period," meaning that the investors (including the founders) who initially obtained shares during the IPO are not allowed to sell their shares yet. The lock-up period will expire sometime later this summer, at which time there will be a huge surge in shares available to trade. In fact, it is estimated that about 84% of the shares will become available by this time. This could be a potentially substantial negative influence on the share price as insiders seek to cash out a portion of their shares or simply want less exposure to the company.
So, where do I think Snap's shares will go from here? Well, quite easily down, based on the information available at this time. I think by September, we could see shares as low as the $10 - $12 range, simply due to further negative pressure for the rest of the summer, and the lock-up expiration. And I'm not alone in this, as "short interest" has increased in the stock, meaning more and more investors are betting against the company.
Enjoy your summer as you use social media to capture your memories, but stay on the sidelines when it comes to investing in Snap Inc., as the hurt will likely only continue.