Shortly after Snap Inc. (SNAP) debuted back in March, I wrote an article that advised holding off on the stock. The basis of that article was the IPO’s similarity to that of Twitter (TWTR). Both were social media companies with massive, growing user bases, but without ever having turned that asset into profit. Even the growth in that situation can become a handicap as it leads to unrealistic expectations that force a young company to focus on producing more of the same rather than on monetizing what they have.
A couple of months later, I repeated the “wait and see” advice after the company’s disappointing first public earnings release. In that second piece, however, I said that it was likely that at some point the stock would represent value. That time has come.
On the surface, the negative aspects of SNAP are still fundamentally the same. They have yet to become “revenue positive,” the polite way of saying that they keep losing money, and have continued to struggle to keep up with sky high expectations for user growth. However, there are a couple of things that have changed.
First, and most importantly for the stock's long-term prospects, there doesn’t seem to be much if any resistance to the advertising on the Snapchat platform. Anecdotal evidence is of limited use, but when it comes to this sort of thing I trust the view of my teenage son and daughter. They have friends all over the U.S., but also in other counties so their view is somewhat broader than most teenagers’. Neither find the gradually increasing presence of advertisements irksome, nor apparently do their friends.
That acceptance of advertising in their feeds is important at this stage. Apart from anything else it makes it far more likely that Snapchat will remain the platform of choice for that generation for at least a while longer. The biggest fear when investing in social media is that you may have found the next MySpace rather than the next Facebook (FB), and the fact that Snapchat has been popular for a few years makes that look far more unlikely.
The second thing that has changed is the market’s perception of what success at Snap looks like. After two bad misses on earnings, expectations for the next quarter are bound to be a bit more realistic. There even seems to be an understanding that the law of large numbers applies to user growth on a social media platform.
Triple digit percentage growth is not that hard when you have a few million users. The more your base grows, though, the harder it is to keep up that percentage, and there are signs that in recognition of that there is an increasing focus on the number of new users rather than the percentage growth.
It is likely that over the next few months nothing will have changed at Snap. They will still be experiencing user growth that at the time of their IPO would have been regarded as lower than desired, and they will continue to struggle to maximize revenue per user. A stock’s price, however, is based on expected performance relative to what is already priced in, rather than actual past results. On that basis, SNAP is, after a difficult six months for early buyers, now a buy.