Snap, Inc. stock fell by over 12% in the last trading session. Given the negative Wall Street commentary, Is it time to exit SNAP stock trade?
Shares of Venice, California-based Snap Inc (NYSE:SNAP), parent of Snapchat, crashed by 12.3% in the last trading session. In stark contrast to the pre-IPO hype, which saw the company price its IPO above the IPO range. SNAP stock closed the last trading session at $23.77 per share, falling below its IPO Open price of $24. After hitting a high of $29.44 on March 3, the stock was hit by negative commentary from multiple Wall Street firms, sending the SNAP shares near to its post-IPO low of $23.5 per share. As we had highlighted in a previous post, we thought SNAP was an IPO you should let go. It's not late to exit the stock, as the risks look extremely high to hold on to those SNAP shares. This was also reflected in our belief that the SNAP stock was overvalued from day 1. So how should investors play SNAP stock from here? Can Snapchat rise enough to justify the massively premium valuations?
Wall Street isn't too optimistic about Snap stock
A number of sell-side analysts on Wall Street have recently chipped in with their commentary on the newly listed stock. And while it's fair to say Wall Street is not always right, the consensus and the similarity in the tone of the post-IPO Wall Street commentary, is scary, to say the least.
Nomura's Anthony DiClemente kicked off the negative Snap commentary, following the Snap IPO last week. The Nomura analyst highlighted a couple of our chief concerns going into the IPO: slowing user growth and the sky-high valuations. In a client note last Thursday, DiClemente highlighted slowing user growth and monetization, fierce competition from Facebook and an expensive valuation. The analyst rated Snap stock at "Reduce" with a $16 price target. If that wasn't bad enough, Brian Weiser from Pivotal research issued SNAP with a $10 price target while stating that Snapchat will face 'aggressive competition from much larger companies' and also focussing on the inexperienced management and slowing user growth. The analyst models SNAP revenue at $6.7B in 2023.
Susquehanna analyst Shyam Patil believes that while early interest could take SNAP stock to High 20's or low 30's, the long term looks bleak given the strong competition from Facebook (NASDAQ:FB). The analyst has a $22 price target with a 'Neutral' rating on the stock. The spate of negative commentary continued, with Needham's Laura Martin writing "Prospect Theory would label SNAP a “lottery-like” stock. Sometimes lottery tickets do pay off."The analyst went on to highlight several fundamental risks to the 'Snap' investment, which are often overlooked by short-term traders. The chief concern in the Needham's commentary was the fact that Snapchat's total addressable market (TAM) is 80% smaller than that of Facebook and the company already has a 50% penetration in its TAM in the United States. With Snapchat going in for a niche advertising strategy focussing on the biggest ad markets (US and Canada), this is certainly a key risk to Snapchat's long-term topline growth.
How do you play the stock?
So, how do you play SNAP stock from here? Go long or go short? Well, if you bought shares in the IPO, it's been a very profitable trade. Snap stock price is still up nearly 40% from the IPO price in just 3 trading session. So, if you are a pre-IPO investor, sell the stock and run. Why? Well, Snap Inc. is now trading at nearly 75x trailing twelve month (TTM) sales, valuation levels which are scary even if just viewed in isolation. Add in the company's negative gross margins, slowing user growth and monetization trends, the fact that the company won't be profitable at least till 2019 and the odds look stacked against the bulls. At these valuations, a miss on growth (users or revenue) will not go unpunished. And as the last couple of quarters have proved, Snapchat's moat isn't very strong with its user growth coming under pressure from aggressive competition from Facebook and its army of products (Whatsapp, Instagram, Messenger). With Facebook only increasing the heat (recent Whatsapp status feature being the latest case in point), Snapchat's user growth could be in deeper trouble than what has been seen. The big gains in SNAP stock have been made, from here on it will be a battle of minor gains and huge risks. It's time to exit the SNAP stock trade.
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