Leading up to the SNAP initial public offering (IPO), Snap Inc (NYSE:SNAP) was the focus of equal parts naysayers and backers.
Many (including us here at Profit Confidential) puzzled over whether the Snap stock price would follow a path similar to Facebook Inc (NASDAQ:FB) or Twitter Inc (NYSE:TWTR).
With the recent Morgan Stanley (NYSE:MS) downgrade, the company is definitely on the back foot and doesn’t appear to be inching closer towards Facebook levels of success. In fact, the SNAP stock IPO price per share was higher when it was initially released than it is today. To sum things up, all is not well in the Snap kingdom.
And that’s why many are beginning to see more of a Twitter projection when they look at the Snap stock price. And companies do not want to be called the next Twitter stock.
Twitter Stock vs. Snap Stock
Ironically, Snap founder and CEO Evan Spiegel deliberately went out of his way to avoid falling into the same pitfall as Twitter when he was preparing for the SNAP IPO.
Courtesy of StockCharts.com
Early on, Twitter famously bandied about high growth rate numbers and user numbers in order to justify its valuation, but the growth eventually slowed, and the Twitter stock price dried up with it.
At the beginning of 2014, TWTR stock was valued at nearly $70.00 per share. Now the company doesn’t even crest $20.00 per share, and there are not many investors who are high on Twitter stock.
Evan Spiegel and co. went out of their way to avoid resembling Twitter, and the pitch worked, at least at first.
Courtesy of StockCharts.com
The Snap stock IPO price per share shot up to about $24.00 in the early days, even though it started trading at $17.00 per share. That huge gain would last about a day or two before the stock began tumbling back to earth.
So is Snap stock going to be the next Twitter stock? I’d say yes. There are just too many red flags right now that make me wary of SNAP stock.
First, remember that its valuation was absurdly bloated. The Snap valuation ended up being around $28.3 billion at its IPO, which—divided by its revenue in 2016—results in a value that is 70 times more than its revenue.
Contrast that with say, Facebook, which has a price-to-sales ratio of less than 13 times, not to mention a much stronger foundation and proven bona fides, and you see that this outcome was always possible for Snap. (Source: “Here’s How Insanely Expensive Snap’s IPO Will Be,” Fortune, February 2, 2017.)
There was always a good chance that Snap was running more on steam than substance, valued on hype rather than its product. While many statistics do point to the social media service being valuable, it never did justify itself as being that valuable, especially considering all the competition in the sector.
Which brings us to the potential final nail in the proverbial coffin for the Snap stock price: Instagram competition.
Instagram Competition and Snap Ad Dollars
Snap ad products and Snap ad dollars are what the company runs on. It said as much in its SEC filings. (Source: “FORM S-1,” U.S. Securities and Exchange Commission, February 2, 2017.)
So when Morgan Stanley downgraded the company, a big part of that downgrade was based on weakening growth numbers and Snap ad dollars. (Source: “Snap shares fall nearly 9% after downgrade by Morgan Stanley, a rare rebuke by a firm that helped bring it public,” CNBC, July 11, 2017.)
And to make matters worse, the note mentioned how “Instagram,” Facebook’s killer app that has long been imitating Snapchat, is becoming an increasingly dire concern for Snap.
Basically, the Morgan Stanley note outlined all the fears that were baked into the Snap stock price. Those fears being that it would face fierce competition from Facebook, that it was overvalued, and that its user base would slow, and, therefore, the ad dollars would similarly fall. To make matters worse, Morgan Stanley was the firm that helped along the SNAP IPO, and while the analysts and underwriters are separate, it’s still not a good look at all for SNAP stock.
Since the share price is now valued lower than the IPO price, the market has basically rebuked Morgan Stanley’s initial call, and its the Morgan Stanley analysts who are confirming as much.
At this point, it’s hard to recommend anything for Snap other than short positions. The company is proving all its doubters right so far, and if it is indeed the next Twitter, the Snap stock price may still have a long way to fall.