Why Snap stock struggles

Why Snap stock struggles

Monday was a great day to be Snap Inc. That’s when the brokerage firms that underwrote its IPO were released from their quiet period, and presto! All of them coincidentally came out with strong buy recommendations, which boosted the stock by about 10%.

The warm glow of all those “buy” ratings soon faded, however. Why? Because Facebook announced new features on Tuesday that duplicated most of the popular aspects of Snapchat, the company’s flagship product. Facebook has more than 10 times as many users, and a market cap that is 10 times as large.

Shares of Snap tumbled in response, not surprisingly, because competition from Facebook is one of the biggest shadows hanging over the stock. But there are others, as Pivotal Research notes: It rates the stock a “sell,” with a target of just $10.

Snap’s revenue is expected to climb by as much as 160% this year, to about $800 million. But even that number is smaller than expected, because of higher revenue-sharing with partners. Is that going to be a trend? Snap isn’t saying, but it could curb growth expectations.

On top of that, Snap isn’t expected to be cash-flow positive until 2020, and that’s the forecast from a relatively bullish research firm. That’s a long time to wait for proof that the company’s business model is sound.

Meanwhile, investors are paying more than 20 times Snap’s projected revenues, which is more than twice what Facebook is selling for, and Facebook is a massive cash-generating machine with a proven track record. Snap didn’t produce any revenue until 2014.

Those kinds of multiples are going to be difficult to live up to. And if Snap doesn’t manage to do so, better look out below

 

Mathew Ingram, Newsletter

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