Snapchat: Snap Inc Stock Is Staring At More Troubles Ahead

Snap Inc (NYSE:SNAP) stock is priced for perfection at a time when analysts are revising estimates downwards. Snap stock looks set for more trouble ahead.

Snapchat - Snap Inc. Stock Is Staring At More Troubles Ahead

Shareholders of Snapchat parent Snap Inc. (NYSE:SNAP) have had a roller coaster ride ever since the Snap IPO. However, while there have intermittent bursts of upside, SNAP stock has mostly maintained its ride down the hill. At the last closing price of $14.48 a share, SNAP shares were quoting over 40% lower than their first day close. And, if this wasn't enough, the Venice Beach, California based operator of the photo sharing platform Snapchat, could be in for more trouble ahead.

Snap Stock Is In Trouble, Analysts Agree.

Wall Street opinion has bordered on extreme as far as SNAP stock is concerned. While bullish analysts have issued the stock with a target price as high as $30 a share, bearish analysts have valued the stock as low as $8 a share.

SNAP stock target price revisions

To put things in perspective, the Wall Street high represents an upside of over 107% from the last closing price of SNAP stock while the lower end represents a 45% downside. Given this kind of divergence in opinion, it's hard to find any agreement among Wall Street analysts. However, recent analyst commentary does offer some convergence of opinion. Only, it's not good for the SNAP bulls.

As we had detailed in a recent post, leading market research firm, eMarketer, cut its revenue estimates for the Snapchat parent. Without going into all the details, here is what eMarketer had to say: "Despite all of its improvements in ad products and measurement, Snapchat remains in the experimental bucket for many marketers. They give it high marks for its creative possibilities and its ability to attract a youth audience, but many have yet to make it a must-buy." The result? eMarketer sees the Evan Speigel led company raking in ad revenue of $774.1 million in 2017, 17.3% lower than its earlier estimate of $935.5 million (December 2016). And, well eMarketer isn't alone with that line of thinking.

Needham analyst Laura Martin believes that SNAP stock could be in for a sizeable correction of 10%-20% from the current price levels. Why? The Needham analyst notes that channel checks are showing weakness in advertiser spending on the platform. In a recent note to clients, the analyst wrote, "we lower our estimates for SNAP’s Daily Active Users by 10% to 178mm (up 3% Q/Q), our ARPU estimate by 9% to $1.25 (from $1.37), our revenue estimate to $223mm (up 74% Y/Y and 12% below previous estimates), our projected EBITDA loss to $187mm (down 72% Y/Y and 20% below our previous estimates), and our EPS estimate to a loss of $0.33 (worse than SNAP’s 3Q16 EPS Loss of $0.13 and 3% below our prior estimate)." To put it simply, Laura sees Snap going from bad to worse. Add to this the fact that Snap stock is currently priced for perfection, and it isn't hard to see why the Needham analyst calls for a near-term downside.

Snap Stock Trades At Steep Valuations

Speaking of valuations, let's take a deeper look at Snap stock valuations. Snap trades at a 27.7x multiple. And well, if you thought that is an expensive earnings multiple, consider this. Snap stock trades at 27.7x the trailing twelve month (TTM) sales, with no profits to show. For perspective, Twitter (NYSE:TWTR) stock currently trades at a 5.4x the TTM sales while Facebook (NASDAQ:FB) trades at just under 15x the TTM sales. However, investors should note that Facebook is hugely profitable churning out billions of dollars in net profits, and is currently trading at 39x TTM earnings while Twitter shares the same fate as the Snapchat parent with its bottom line deep in the red.

Is Snap Stock worth the price?

Steep valuations are often accompanied by the question, Is it worth the price? The case is no different with Snap stock. So, is Snap stock worth the price? Well, we believe that now isn't the best time to go long Snap stock. Why? As we have written earlier in the post, stagnating growth, a negative bottom line and a stock priced for perfection make SNAP stock a highly risky play. Given the recent analyst commentary and the downward revisions in estimates, Snap stock will, more likely than not, experience multiple compressions, which can hurt SNAP bulls over the coming quarters. Add to this the business model (low gross margins and a 'niche market' approach) and voting rights skewed in favor of the founders/management, we believe that SNAP stock is a highly risky play headed for more troubles ahead. Investors seeking exposure to the social media space would be better off buying into Facebook stock, which we believe is an attractive risk/reward play. Facebook stock also one of our top stock picks from the technology sector, which have crushed the broader market by over 150%.

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Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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