Plateauing growth, steep valuations and insider selling - Snap Inc. stock bulls might be in for more disappointment.
Life as a publicly listed company has been nothing short of a nightmare for Snap Inc (NYSE:SNAP) and its investors. Snap bulls often compare Snap Inc. to Facebook's first year as a public trading company. However, Facebook never lacked growth while Snap has been disappointing on this front, missing most expectations for two consecutive quarters now. Shares of the Snapchat parent closed the last trading session at a price of $13.12, down over 50% from their all time highs. SNAP stock has now spent over a month below its IPO price of $17 a share. And, if you thought SNAP stock price was near the bottom, think again. The worst is not yet over for SNAP stockholders. Here is why.
Snap executives are dumping the stock.
Shares of Evan Spiegel led Snap have been in a constant downtrend ever since the company hit its post-IPO high of around $29.4 a few days post the Snapchat IPO. And well, the journey from $29 to $13 happened even before the first post-IPO lockup expiry, which barred early investors and key executives from selling SNAP stock. Key employees were allowed to sell stock following the second post-IPO lockup expiry, which occurred on August 14, a day when SNAP stock changed hands in the $11.3-$13.1 range. And, if you thought that a battered SNAP stock was a worthy buy, actions of key executives seem to disagree.
As per recent disclosures, key Snap Inc. executives sold their first batch of shares, for an estimated $9.3 million, following the lockup expiry on Monday. Now, here comes the important question. If SNAP insiders believed Snapchat had a bright future, why would they be selling a battered stock which has dropped over 50% from its post-IPO highs? While its possible that these key employees were de-risking their possibly large SNAP investments, the insider selling doesn't inspire much confidence. More so, when you look at some recent commentary from Wall Street.
Snapchat Parent's Stock Headed Lower?
Recent Wall Street commentary on SNAP stock has been a mixed bag. While Cantor Fitzgerald upgraded SNAP to 'Overweight' following the lockup expiry, analysts at SunTrust initiated SNAP coverage with a sell rating, joining the ever-increasing army of SNAP bears. Cantor assigned the stock with a $17 price target, implying a near 30% upside from the last close. On the other hand, SunTrust believes the stock is worth only $10, implying a 31% downside from the last traded price. The dichotomy in the opinions isn't something new for Snap and its investors. So where exactly does the real worth of SNAP lie? The answer is probably somewhere in between, depending on whether you are a SNAP bear or a bull.
Siding With The SNAP Bears
Snapchat might be a great product, but it probably caters to a niche market. Given the recent user growth trends, it's hard to imagine that Snapchat will ever reach the scale of Facebook (NASDAQ:FB). In addition, the increasing competitive pressure from Facebook is beginning to take a toll on Snapchat's growth, which has missed even modest 'user growth' expectations in the last couple of quarters. The latest SNAP earnings numbers were far from decent, with the company missing expectations on possibly every metric: Revenue, earnings, user growth and ARPU (Average Revenue Per User).
Poor growth numbers so early in its growth cycle, canvassed with the premium valuations (24x TTM sales) which the stock continues to trade at, make SNAP a highly risky play. We believe that Snap Inc. has to offer evidence of sustainable user growth and monetization growth before the risk/reward can be called favorable. In light of the current valuations, and Snapchat growth seeming to plateau, we would side with the bears. SNAP stock could be headed lower. Hence, investors seeking exposure to social media plays should look at more formidable rivals like Facebook, which is among our top stock picks from the technology sector, which have crushed the NASDAQ Composite by over 145%.
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