There are no clear incentives for owning Snap Inc. (SNAP) . It might be trading at $5.50, but that does not make it cheap.
Snap is easily the worst of the social media tech stocks. The app itself is limited in overall potential engagement, and tends to draw in a single age demographic. The company has spent a bunch of time and money on camera glasses that I feel are inherently unlikely to succeed (who wants to walk around with sunglasses with big cameras in them? Can't you just use your phone?). Worst of all, the financials are awful. With no clear path to revitalizing something that never really did all that well to begin with, I see no reason for Snap's stock to be a buy -- even after the 15% decline over the last month.
The stock has been falling for the better part of the year, down 58% over the last six months. Of all the tech stocks, the turmoil facing SNAP is the most justified. There's almost no rational reason to own a stock that's turned in five consecutive quarters of net losses. To the company's credit, they did narrow their third quarter losses year over year by 26% to ($325.15) million. I'm not sure how much applause that really deserves, but it's something. For the first nine months of the year, revenues are up 46.6% to $790.6 million. Off of that large scale sales increase, net income is still negative at ($1.06) billion. Though the losses have been contained to a degree this year, a mounting share count has hampered the benefits for shareholders. Earnings per diluted share for the first nine months of 2018 are ($0.83) per share.
The biggest challenge facing Snap is user growth. The company actually lost 2 million users in the third quarter. I still say the problem relates to a product lacking strong utility to consumers, and a battle with Facebook's (FB) Instagram that Snap can't win. It's not a coincidence that Instagram user growth increases at the same time that Snap's user growth stalls out. Of course, this is not to say I'm advocating Facebook's stock at this time either. They have their own problems.
Without user growth, the potential for advertising revenues becomes limited. Advertising is pretty much the only way social media stocks like this can make meaningful money. I certainly don't see the logic in putting money into something like this before the company fixes the problem at hand. Moreover, I don't see the point in putting money into a stock that doesn't seem anywhere near profitability. Snap had just over $350 million in cash at the end of the third quarter.
Analysts have the company losing money next year as well. While I don't always agree with analysts, Snap seems pretty primed for more losses. To that end, I agree with others that feel a cash raise will be needed at some point in the not-too-distant future. As Snap has primarily focused on dilutive stock financing, the future certainly doesn't bode well for the eps potential. Then again, increased shares might help diminish the appearance of losses by divvying the net loss over a larger share base. It's a bit sad to think of that as a good thing, but that's pretty much where I'm at with Snap. I'm not optimistic for a company that has an app with a weak user growth story, and no other viable options save for a pair of camera glasses. I think one has to take a good hard look before thinking about touching this stock. It's not a good one, even after the fallout of the past month.