Is SNAP Stock Overvalued?
Snap Inc (NYSE:SNAP) had quite the wild ride when it first opened to the public. The SNAP IPO price per share was pegged to open at $17.00, but quickly shot up by 41.2% when shares began trading. Glowing after a solid first day on the open market, it makes sense why investors might be feeling the Snapchat love right now. But others aren’t too sure, and that all comes back to the Snapchat IPO valuation. Frankly speaking, the Snap valuation vs tech giants from the past might just turn off a lot of people wanting to put money in Snap stock.
Why is that? Well, the Snapchat IPO valuation was high. Very high. Maybe too high. And that could hurt the Snap stock forecast.
While the Snapchat first-day closing valuation of $28.3 billion isn’t the largest on the market (after all, Uber Technologies Inc. currently maintains a gargantuan $66.0-billion valuation) what makes it so concerning is its price-to-sales metric, which is calculated by dividing the company’s market valuation by its revenues.
With the Snapchat IPO valuation of $28.3 billion after markets closed on its first day as a publicly traded share, divided by the company’s revenues of $404.4 million in 2016, and you have a value placed on the nascent public company that is 70 times higher than its actual revenue. (Source: “Here’s How Insanely Expensive Snap’s IPO Will Be,” Fortune, February 2, 2017.)
This, of course, without mentioning the fact that Snap is not yet profitable. Snapchat lost a reported $514.6 million in 2016. Eventually, SNAP stock will need to define a path to profitability if it wants to avoid past tech companies’ missteps. (Source: “Snap lost $514 million last year and warns that it ‘may never be profitable’,” Business Insider, February 2, 2017.)
And just so you don’t go thinking that this sort of revenue gap (or chasm) is normal, let’s do a quick (and not the first) Snap vs. Facebook Inc (NASDAQ:FB) comparison.
Facebook’s price-to-sales is less than 13 times its valuation. Of course, Snapchat is a much younger company with much more room to expand, while Facebook is an established tech powerhouse likely to see more incremental improvements over the coming years instead of a giant leap forward. Still, Facebook reaches over a billion people worldwide and has a trusted and proven product. Not to mention that the company raked in a net income of over $10.0 billion in 2016, giving Facebook quite the upper hand on a company still burning through cash to the tune of hundreds of millions. (Source: “FB Company Financials,” NASDAQ, last accessed March 7, 2017.)
|Snap Inc (NYSE:SNAP)||69.98|
|Facebook Inc (NASDAQ:FB)||12.6|
|Yahoo! Inc. (NASDAQ:YHOO)||6.8|
|Alphabet Inc (NASDAQ:GOOG)||5.2|
|Yelp Inc (NYSE:YELP)||4.3|
|Twitter Inc (NYSE:TWTR)||4.2|
|GoPro Inc (NASDAQ:GPRO)||1.1|
Of course, it would be unfair to compare the young buck Snap to the aged giant Facebook, but still, to any of the Snapchat doubters out there, the massive gulf between revenue and valuation could certainly be off-putting.
Alphabet Inc (NASDAQ:GOOG) has a price-to-sales ratio of only about 5.2, so again, Snapchat is far and away the industry leader in this inauspicious category.
But the one thing that Snapchat has on its side—and it’s a big bonus—is exponential growth. The Snap revenue grew from $58.66 million in sales to $404.48 million from 2015 to 2016. (Source: “Global annual revenue of Snap from 2015 to 2016 (in million U.S. dollars),” Statista, last accessed March 7, 2017.)
If Snap Inc can keep this heady growth up, then sure, you can begin to justify the massive Snap launch price and valuation.
Of course, investors then have to ask themselves if they see the company growing to the point where it can justify the Snapchat IPO valuation. If you can’t make that case to yourself, then you might want to forgo SNAP stock.
On the other hand, if you view Snapchat as the next big social media behemoth, then this may be your best share of 2017.
And Snap is angling itself as more than a social media company. Instead of trying to go head-to-head in a Snap vs. Facebook death match, the company has tried to position itself not only as different than Facebook and its subsidiary Instagram (or at least different enough that the two social media empires can exists side by side), but also as a tech developer heading in a totally unique direction.
Take the Snap “Spectacles,” which we’ll revisit later in this piece. The device is part of Snap Inc’s attempt to reposition itself in the market as a camera company.
“Snap Inc. is a camera company,” reads the website homepage. “We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate.” (Source: “Snap Inc.,” Snap Inc, last accessed March 7, 2017.)
While the company still derives most of its money from the online app “Snapchat,” physical products like the Snap Spectacles are clearly where the company is trying to maneuver itself towards the future.
And this just might be good news for SNAP stock supporters. Because if there’s one comparison the company would rather avoid, it’s to another, less celebrated social media giant: Twitter.
The Snap vs. Twitter contrast, actually, might just be one of the more frightening ones for early SNAP investors.
Snapchat IPO Valuation and Tech Comparisons
The Snap vs. Twitter look is quite a departure from the Snap vs. Facebook consideration. That mainly has to do with the two rival social media giants’ outlooks.
Will SNAP stock be the next Facebook?
Chart courtesy of StockCharts.com
. . . or the next Twitter?
Chart courtesy of StockCharts.com
While Facebook can’t seem to do wrong lately, Twitter can’t seem to do right. TWTR stock is down over three percent this year, while FB stock is up almost 20%. Over the past 12 months, Facebook saw gains over 26% while Twitter experienced a decline of 18%. And since we’re talking about IPOs, TWTR stock hasn’t exactly been flying high since going public. The company is down 62% since opening up on the market. As for Facebook, FB stock is now valued 188% higher than when it first released.
So it makes sense that Snap would rather not be mentioned in the same breath as the struggling Twitter. While it would also prefer that a Snap vs. Facebook rivalry doesn’t develop either, at least being mentioned in the conversation with the uber-successful Facebook is still a vote of confidence towards the company.
And that’s the thing about our Snap valuation vs tech giants conundrum. While the final number is undeniably lofty, it’s all a matter of perspective. If you see more Facebook in Snap, then the revenue dissonance to valuation isn’t all that scary. At the same time, if you believe Snap could be the next potential social media empire to fumble a la Twitter, then it makes sense as to why you would avoid this share.
In order to prove the Snapchat IPO as grossly overvalued or the proper pricing, we’ll have to look to the future. More importantly, we’ll have to figure out if we’ll be seeing this future through Snap Spectacles’ lenses.
Snap Spectacles, SNAP Stock, and the Future
Snap Spectacles have only recently been released to the public, and as such, have yet to make up a substantial part of Snap Inc’s business model.
Available in the U.S. for $130.00, the offering from the self-described camera company is an important first-step if Snap is serious about branching out from software into the corporeal world of hardware. The Bluetooth sunglasses are essentially cameras-as-spectacles, allowing the user to capture video and upload it directly to Snapchat.
At first, Spectacles were only offered through vending machines in a pop-up guerrilla marketing campaign. Now that the general public can now try on a pair for themselves, it’ll be interesting to see how much Spectacles will be able to affect SNAP stock going forward.
Speaking of going forward, a single camera-glasses combination is hardly a revolution. If Snap wants to be the next big hardware producer in cutting-edge camera tech, then there definitely needs to be more coming down the pipe.
There are currently reports going around that both a drone and a 360-degree camera are in development by the company, which again lends credence to its stated intention of transitioning into hardware.
But few companies have been able to turn their online, ephemeral success into real-world concrete product sales. Consider that “Google Glass” was widely panned by critics before its unceremonious demise less than a year after its public release.
The Snap SEC filings listed several big tech competitors, including Twitter, Facebook and Google. While Facebook and Google especially have been looking to get more into hardware production (see VR headset “Oculus Rift” and self-driving car project “Waymo”), these companies are still firmly rooted in the online world. (Source: “Snap has to start proving what it means to be a camera company right… now,” Quartz, March 1, 2017.)
In a bit of irony, a company famous for the short-lived aspect of its app is now looking to get into the building of concrete items in order to differentiate itself from the competition.
Which brings us to the final divergence between SNAP stock bulls and bears. If you believe that a company known for creating a social media application that is widely popular among that key teenage and twenties demographic can now transition into building popular, innovative, and attractive camera tech, then this could be a winning stock.
At the same time, transitioning from apps to hardware isn’t easy, and it isn’t exactly as if the wearable market is blowing up right now, as evidenced by GoPro Inc (NASDAQ:GPRO) and Fitbit Inc‘s (NYSE:FIT) rather dismal performance over the past year.
If Snap Inc can come in and fill that void or take advantage of an opening in the market, than there’s a great chance for the stock to soar. Conversely, if it follows Twitter, GoPro or Fitbit’s path, then this might be a share to avoid.