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Snap: For Now Valuations Are Irrelevant

Jun. 05, 2020 3:49 AM ETSnap Inc. (SNAP)31 Comments


  • Snap's auditors put out critical comments on Snap's financials.
  • I question whether Snap's growth in users will be strong enough to offset its decline in pricing.
  • Exuberant valuation with no upside left, asides from speculative.
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Investment Thesis

Snap (NYSE:SNAP) remains shockingly valued. The company continues to trade at approximately 14 times sales, even though its revenues are set to decelerate meaningfully for the remainder of 2020.

Given that Snap's auditors put out a critical matter over Snap's revenue recognition, I am further troubled by its excessive valuation.

State of Play

To argue that the market appears to be losing its mind is to sound like sour grapes.

Particularly, when you are aiming these comments at a cult stock, which continues to be priced at exuberant valuations and shows no sign of slowing down -- so I'm flummoxed.

Of course, shareholders would declare that my style of investing, which puts prudence above gains is outdated. So what's actually happening with Snap? Investors clearly have come to terms, by now, that Q2 2020 will be carnage. But at the same time, investors appear to be more than satisfied to look past this.

Thus, the question that matters here is how far past Q2 are investors willing to look? Are investors expecting that by Q3 2020, Snap will be back to normal, with a nothing-to-see attitude? Or are investors cognizant that 2020 will be unimpressive, but that 2021 comparisons will be so strong, thereby ultimately justifying paying this high valuation today?

Breaking Down Snap's Revenue Stream

The graph below reminds us that nearly 70% of Snap's revenues are derived from North America.

Source: author's calculations, Q2 2020 10-Q

Consequently, whatever dynamics take place in advertising in North America has an overarching impact on Snap's performance.

Why is this important? Because know from numerous companies, including Alphabet (GOOGL)(GOOG), Facebook (FB), and Twitter (TWTR), that have exposure to largely similar advertising dynamics that the market weakened in earnest starting the second half of March.

Further, although the advertising sector stabilized

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This article was written by

Michael Wiggins De Oliveira is an energy specialist whose primary focus is capitalizing on “the Great Energy Transition” - the confluence of decarbonization, digitalization with AI, and deglobalization - to achieve greater investment returns. Through his 9+ years analyzing countless companies, Michael has accumulated outstanding professional experience in the energy sector and a following of over 40K on Seeking Alpha.

Michael is the leader of the investing group Deep Value Returns. Features of the group include: Insights through his concentrated portfolio of value stocks, timely updates on stock picks, a weekly webinar for live advice, and "hand-holding" as-needed for new and experienced investors alike. Deep Value Returns also has an active, vibrant, and kind community easily accessible via chat. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (31)

Don't buy more SNAP. Lighten up on SNAP. Re-Buy SNAP in 16s...after Jul eps...Maybe!
15 Jun. 2020
I bet it goes down more than to $16!!
Jonathan Way profile picture
I’ve had successful trades in SNAP over the past couple of years. Full disclosure: I’ve been building a short position b/c it’s trading way ahead of its value which realistically just below $15. I’m surprised it has continued to leg up considering Evan Spiegel (CEO) just sold 2.4 million shares last week at $21.01... not a good sign for those going long. Furthermore, the stock staled and hit resistence at the 20 handle and faded in momentum. IMO, it may run up to $22 before retracement. But the harsh reality is that sooner rather than later fundamentals will be called to question... and when that happens SNAP will fall hard.
11 Jun. 2020
Here comes $8 again lol
Serious question, why would you think $8 is coming?
11 Jun. 2020
It was there two months ago. The market is way ahead of itself. I think the virus is going to be worse than it already has been in coming months. It’s going to be disastrous in my opinion.
Well I’m short myself so don’t get me wrong but just the fact that stock was somewhere before posting much better than expected quarter results doesn’t mean much. Good luck!
Sure wish I knew what ARPU and DAU stood for in your charts...must have been defined in a prior article. I'd guess that it's comparing kids watching to advertisers paying for them to watch. But it's still pretty nebulous to a new reader of your articles.
Kamil Kolacek profile picture
ARPU = Avg Rev Per User
DAU = Daily Active Users
If you listen to these paid, so called analysis you will never make money! Do your own work, I did! I bought snap, held it and accumulated additional shares when the stock price dipped. If I were a new investor in snap, I would take a small position now and continue to add to my position on drops. 3 years from now you will thank me
Tues. June 9th...Market falling back from a "new 2020 high", and SNAP still trying to climb?! Never a profit from IPO on...neophyte Users & Holders..totally unproductive "product". What's with this Market that it can go up during an obvious (& "declared") Recession. You know the answer: free printed money..FED propping up the Markets at Trump's behest (demand).
Sadly, the sign of a declining nation (3 centuries?).
Good write-up and analysis, Micheal! I agreed that the stock is quite overvalued. But its recent momentum is quite absurd. What do you think about the stock price action.

Remember who told you to buy snap hold snap and accumulate more on the dips!
MAGA2024 profile picture
bro check out my post on StockTwits under "longsnap", up 80 k with snap calls off a 10k investment
carlomiami profile picture
JJ every time this two clowns Michael and BigEarn trash SNAP , the stock goes up
See you at $25
Yeh...and never a reason to buy, hold & accumulate.
Teenagers & "zoomers" are walking away from their SNAP screen in massive numbers--to get back to the reality of earning a living. SNAP is a permanent loser for earnings from its format, and its quote is ridiculous. Today (6/5) is probably the top for SNAP quote--and for a lot of
unproductive companies that have jumped 8%..10%..even 15% today alone. The "Hanging Man" chart formation forming is an apt name.
This aged well (and I am short from $15 :))
MAGA2024 profile picture
@Michael Wiggins De Oliveira You call this a cult stock but you have wrote 7 negative articles about Snap in its short history and it continues to rise. This stock takes way to much hate.

Michael Wiggins De Oliveira profile picture
From the graph of Snap at the bottom of the article, it appears to me that neither bears or bulls are winning. What do you think?
MAGA2024 profile picture
@Michael Wiggins De Oliveira I never said the bulls were winning but if someone had to choose you don't think it would be the bull side??
"...have written.." Regardless of poor grammer, you're still enjoying a ridiculous rise to 21+, MAGA.
I agree with your core assumption here that Marketing spend is decreasing in Q2. I work in the industry and it's absolutely what I've observed. For this reason I was surprised that FB already reached new highs. I even went back to check that I didn't confuse 'stabilisation' of ad revenue with 'recovery'. I expect Q2 results will be the first YOY revenue decrease FB report. Same for Google, Snap etc. FB is traditionally sensitive to bad news. What are you thoughts on the other platforms in this sector? I plan to buy FB and GOOG once the Q2 results are on the table. Agree SNAP is overvalued.
Michael Wiggins De Oliveira profile picture
@Growth Movement
Very exciting comments.
Personally I'm not getting involved with FB because I think I can do slightly better amongst my stocks.

Having said that, by far and wide, Facebook is the one stock I would unquestionably buy (Disclosure: I have no position).

Also, even though you are correct about FB's Q2 (and GOOGL for that matter, I wouldn't mind owning that one), I would not wait to market time my entry. If it makes sense to you now, go in now. Don't wait for it to fall 5% and hope to be ready to buy into a sell-off.

In my experience, buying into bad news is very, very difficult.

Good luck.
Kaiserdog76 profile picture
I like your article and even though I disagree with allot of it I respect the work you have put in. I am long Snap I must disclose. I would ask you a question. During the look down and the subsequent protests Snap is being used more or less? I would say allot more. Teenagers and zoomer’s are diehard users of this app and I think it deserves the high multiple and if they can get it right? Well just look at the share prices of FB or some others to see where it’s potential lies. Share price is only part fundamentals and other part is optimism or belief in what it will become. I’m more concerned with them doing stupid political gamesmanship and that I think does pose a serious threat to their share price. Any ways good read and cheers
Michael Wiggins De Oliveira profile picture
Thank you for you comment, Kaiser.

Many different aspects we need to unpick here.

1) Yes, users will go up. I noted this throughout. But if the APRU, that means pricing, goes down, then your increased users MAY not be enough to offset pricing.

2) Facebook is not comparable. Yes, Facebook has a huge market cap, but it trades at a LOW MULTIPLE. Snap is trading with a small market cap, but its multiple is extended.

3) I'm not too concern about the political side. So no comments on that front.

4) I have no doubts that their fan base is loyal. What I have trouble about is whether the stock is priced for sustained growth and whether that growth will continue in the next few quarters, into next year.

Good luck. Thanks for your comment, Kaiser.
I totally agree. What a shame you’ve put the work in to highlight how overpriced snap is and Kaiser’s takeaway is that Snap’s share price should simply be a percentage of Facebook’s. Way too many fanboys invested in snap.
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