Snapchat Has Already Lost the Battle

 | Aug 09, 2018 | 2:25 PM EDT
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Of all the social media stocks, Snap Inc. (SNAP) is by far the least promising.

At a time when Facebook (FB) is taking big hits despite profits, Snap is a cash burn affair. The company's second quarter results demonstrated that the company isn't going to change that trend anytime soon. I'm extremely bearish on this stock. The value plays are starting to have their day, and this one doesn't even come close.

Second quarter revenues increased 44% year over year to $262 million. That growth was pretty great, but it didn't amount to any meaningful financial gains. Snap touted a 20% reduction in net losses, but a loss is still a loss. You can't lose $357.8 million in a quarter and expect investors to be happy. Furthermore, it's been long enough that shareholders shouldn't be dealing with this sort of thing anymore. Snap went public as an essentially unprofitable business, and I don't see anything happening that is changing that.

Yes, the diluted loss of $0.21 per share is a percentage improvement year over year, but it certainly doesn't justify Snap's share pricing even after yesterday's pullback.

The caveat that everyone has always thrown against me when it comes to overvalued tech companies is the "future earnings potential," that almost mythical potential where Snap will make billions and justify its share pricing. To do that, they have to monetize their user base. While the company has certainly made strides to cut its quarterly losses, they haven't really shown that their platform can be profitable. To make matters worse, their user base just shrunk.

With a 1.8% decrease in its daily active user count over last quarter, Snap's 188 million DAU's doesn't even compare to its rival: Instagram. People can talk about Snap's financials, management, and general position all day long. The real story here is Facebook's Snapchat equivalent. Instagram has outpaced every social media app lately in terms of growth rates. The picture/story/comment app now has over 1 billion users. In fact, Instagram annual growth is bigger than Snap's entire consumer base. I think the decline seen in Q2 is evidence that Snapchat is now losing users to outside mediums; principally Facebook's Instagram. Facebook essentially molded Instagram into a better version of Snapchat, and linked it to Facebook. It was a great move, as it binds users into all of Facebook's products. Based on the clear difference in growth and financial success, I don't see how Snap can compete with this.

I'm honestly not sure what activists can even push for from Snap's board at this point. Evan Spiegel has kind of already lost the battle. When they altered the app, users got mad. They walked back to the way it was, users declined.

Not everything is Snap's fault.The company is a part of a bigger picture, where Wall Street is realizing that there are growth limits for these social media companies.

Facebook delivered increased profitability in the second quarter, but relatively flat user growth. The company subsequently lost over $100 billion in market capital. The irony here, is that Facebook stock isn't nearly as expensive as Snap's. They are creating meaningful revenue/earnings growth, and they still took a beating. Twitter (TWTR) also took a pounding over its lackluster user base in the second quarter. Again, there's a currently profitable business that is suffering from user stagnation. Because Snaps is by far the worse off financially, I expect more downside ahead.

The company's guidance is predicting a minimum EBITDA loss of $160 million in the third quarter. Analyst estimates are forecasting a loss of $1.08 per share for the full fiscal year. 2019 estimates are predicting a loss of $0.93 per share. Even if Snap manages to beat those markers, we're still talking about a unprofitable enterprise here. Why should anyone pay $12.54 for this?

Facebook is performing better on all the metrics, and it's a valuation bargain compared to Snap. In a sector that's taking massive heat over the slowing overall growth potential, I just don't see the logic in buying the company that's doing the worst financially.

At the very least, I see downside pressure on the share price because of the companies need for cash. Even with the $250 million cash infusion from Saudi Arabian investment, I think you're going to keep seeing dilution here. The company will need to issue incremental stock to keep financing itself. That in itself should put pressure on pricing.

On the other hand, it'll diminish the appearance of losses on a per share basis, but that's not something I'd be too proud of.

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