Snap Inc. IPO & Stock Analysis (NYSE: SNAP)

Snapchat’s parent company, Snap Inc., went public yesterday, March 2nd, 2017. The company issued 200 million class A non-voting shares of Snap stock, and its investment banking underwriters set an offering price of $17/share. This initial public offering raised $3.4 billion for the company to fund its operations. Snap stock is currently trading around $27/share which gives the company a market capitalization of about $31.6 billion.

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You can read the company’s S-1 filing (registration statement for IPO) at SEC Edgar – Snap Inc. S-1.

Snap Stock Fundamental Analysis

Snap Inc. is exceedingly difficult to value because it has not yet produced a profit, and it has yet to develop a viable path to monetization. For the time being, there are no shares available for short selling. Additionally, it takes time for a standardized option chain to be created and offered to market participants. The net effect of these two aspects of the IPO will likely be for the share price to continue its upward momentum. This, of course, assumes there is not a systemic event that corrects the overall stock market.

On a fundamental basis, investors should hesitate before piling into this stock. Monetization, and ensuring profitability seems easily attainable for a company like Snap and its glamorous stock. Individuals interested in becoming Snap shareholders would do well to look at the problems of Twitter, GoPro, Fitbit, and Twilio. Fads, massive user bases, and innovative platforms are characteristics of physical growth. As Benjamin Graham notoriously stated, “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”

Snap stock S-1

For the year ended December 31st, 2016, Snap Inc. had a loss of $520,385,000. This equates to roughly (.64) earnings per share, basic and diluted, of class A stock (the class of stock issued in the IPO yesterday).

Likewise, Snap Inc’s 2016 year-end cash position was $987 million. It ended 2016 with $1.7 billion in assets, $203 million in liabilities, equity of $1.5 billion, and an accumulated deficit of $1.2 billion. About $400 million of Snap’s assets come from goodwill and intangible assets.

Successful Monetization Is the Only Route to Profitability

Companies attempting to follow in the monetization footsteps of Facebook (advertising on a growing user base) may find difficulty in this endeavor. Even though Facebook saw its initial user growth come from teenagers, it likely would not have turned profitable if older demographics had not created accounts on its platform.

And then there are platforms like Twitter, which manage to engage non-millennial generations yet are still unable to significantly monetize the user base. The reason Twitter’s path to monetization is fragmented is that its platform provides a more informal, less-engaging experience.

Common Sense Regarding Non-GAAP Figures

Avid Snapchat users do spend a lot of time on the app on a weekly basis. However, a large portion of that time is spent creating content– not viewing it. Snapchat is currently unable to monetize the snap creation process.

As the company stated in its S-1 Registration Statement, “On average, our Daily Active Users visit Snapchat more than 18 times each day.” In all likelihood, many of these “times” are when the user is either creating snaps or sending private snaps and messages to other users. Snapchat only makes money when users on its platform view content, such as snap stories, of other users.

Even with 158 million active users as of the quarter ended December 31st, 2016, these users only spend an average of 25 minutes per day on Snapchat. 

To put that in perspective, the average American over the age of 15 spends 2.8 hours per day watching TV according to the Bureau of Labor Statistics. In other words, people spend 672% more time each day watching cable television than the average Snapchat user spends on the app.

Snap Stock Rating

Snap Inc. (SNAP) is likely going to be a retail Wall Street favorite in the short-term future. After all, it is the biggest tech IPO since 2015. The company has plenty of cash to get through whatever its upcoming trials and tribulations may be. However, its business model is unproven. For Snap Inc. to be successful and experience continued growth it will have to penetrate the older demographics market which is highly unlikely.

Even as this post is being written, the growth rate of Snapchat’s active users is decreasing. One Wall Street investment firm has already given Snap stock a sell rating.

I believe Snap is going to be another example of a company with a great software application and limited monetization capability. I highly encourage all of our readers to take some time and read through the company’s S-1 filing before purchasing the stock. Use professional skepticism as you read it and make a note of any red flags that pop up. Then you can at least make a somewhat informed decision about the stock.

We have added Snap Inc. to our Bearish List. My price target on Snap stock is $15 per share which will be updated after the company’s first earnings report.

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