I have to admit, Snap Inc. (SNAP, Financial) has a very attractive and additive platform on its hands in the form of Snapchat. Although I am not a user, the platform’s swift rise to popularity suggests it is here to stay. With Snap still reporting tremendous user and revenue growth, the market has put a very high price on the stock.
Snap went public last week. Shares, which were issued at the initial price of $17, shot up quickly and touched $27 in just two trading sessions. Despite the fact Snap is growing consistently and revenue is projected to continue soaring, I do not think investors should consider buying the stock at current levels.
Insider selling and lack of profitability
Snap insiders sold nearly $1 billion worth of shares as part of the initial public offering and I believe they will continue to do so. Founders Evan Spiegel and Bobby Murphy, however, will hold the controlling stake as they own a large portion of the voting stock. Snap offered 200 million Class A shares in its IPO that gave investors voting rights, but they also came with a clause to prevent holders from selling the stock within the first six months. Investors with Class B shares cannot have a say in what direction the company will go, which may be a cause for concern among many investors.
In addition, despite Snap’s gargantuan valuation, the company is still losing money and is not expected to turn profitable until 2019. Estimates give investors a rough idea about Snap’s path to profitability moving forward, but basing an investment decision on estimates for two years down the road is not wise as a lot can change in that time.
With Snapchat’s daily active user growth rate already slowing down drastically, investors should be skeptical of the company’s ability to augment its profit moving forward.
Summing up
Despite the success of Snap’s IPO, investors should be very cautious. With a valuation of over $30 billion, no one can make a lucid case for Snap being a bargain. Since the company’s path to profitability is still unclear, the justification for its current valuation is not there. As a result, Snap is a sell at its current market price.
Disclosure: No position in the stocks mentioned in this article.
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