Our Survey Says: Sell Snap Inc

The trend is your friend. So say prodigious and hapless traders alike.

In the case of Snap Inc [NYSE:SNAP] the trend was up for the first two days of trading — buy! But as of yesterday the trend is down — sell! And it only got worse overnight.

Source: Bloomberg
Click to enlarge

Technical analysts — of which your editor, thankfully, is not one — will often tell you to only watch the charts…nothing else matters.

In this instance, we think not.

After the overnight performance of Snap, the stock is now trading at its lowest point since listing last week. It is, of course, still above the US$17 initial public offering (IPO) price.

Not being an expert with Snapchat, or any other social media vehicle for that matter, we conducted a survey of one over the weekend.

That was with our eldest daughter. We tried to be subtle about it, but probably just ended up sounding like a senile old idiot. Our conversation, as we remember it:

Editor: ‘So, you use Snapchat, right?

Daughter: ‘Yes.

Editor: ‘Erm, what do you use it for?

Daughter: ‘Sending photos and things.

Editor: ‘How does it work?

Daughter: ‘You can send a photo or video and it appears on their screen for between one and 10 seconds, then it disappears.

Editor: [Confused expression] ‘So, does it stay on the screen until you delete it?

Daughter: [Confused expression]

Editor: ‘I mean, can you keep it on the screen for as long as you like?

Daughter: ‘No. [Speaking slowly, and in the voice of someone talking to a senile old idiot] It disappears after one to 10 seconds.

Editor: [Confused expression] ‘And what about advertising. Does it display any ads?

See how we craftily and deftly got to our intended point? Genius.

Daughter: ‘Yes. They’re annoying.

Editor: ‘Why are they annoying? Have you ever clicked on one of them?

Daughter: ‘Yes, a couple of times. But they never seem to appear.

Editor: ‘OK. Remember to indicate when you change lanes!

Yes, we conducted our annoying interview while teaching our daughter to drive. That’s safe driving folks.

Regardless, our survey (with a margin of error of +/-100%) confirms our doubts about Snapchat. Generating revenue from advertisers is fine. But at some point, the advertisers have to see that they’re getting value for money.

Analysts forecast that Snap Inc will generate just over US$1 billion for the 2017 financial year. For the last 12 months, it has generated US$404.5 million.

So, revenue will have to increase 150% from here. Possible?

Sure it is. Don’t get us wrong, revenues have grown handsomely. And with the IPO, Snap Inc will be flush with cash which it can spend on acquiring new advertisers.

Even so, we can’t help thinking of other businesses where aggressive customer acquisition strategies haven’t worked, because the cost to acquire customers didn’t match the spending level of those customers.

Discount coupon company, Groupon Inc [NASDAQ:GRPN] is a classic example. After the hoopla surrounding its IPO in 2011, the stock peaked at US$26.19 per share.

At last night’s close, it was US$4.04 per share.

Groupon has seen next to no revenue growth since 2014. And aside from a meagre US$20 million profit in 2015, the profit and loss statement has been mostly awash with losses — US$194.6 million of them last year.

Then there’s Yelp Inc [NASDAQ:YELP]. It earns revenue by getting businesses to take out a listing on its website. Once on there, users can rate the business.

That’s fine…unless a business gets bad reviews — which can happen, even to the best businesses. In that instance, what is the benefit of a business paying for a listing?

Yelp has experienced revenue growth. But profits are largely a figment of investors’ imaginations. For the 2016 financial year, the company lost US$4.7 million.

Not a huge amount, but perhaps indicative of the company’s future.

In the online world, we figure that businesses mature very quickly. They don’t have the benefit of time to see how they or the market develops. They need to make a splash and make money quickly — mainly so they can reinvest profits, without having to dilute existing shareholders by issuing new shares.

For that reason, we figure that if a ‘trending’ company can’t break through and profit within two or three years of listing, odds are it never will make a profit.

Or, certainly, not a profit worth worrying about.

This could be the biggest story of the decade

Snap Inc isn’t the only big stock market story grabbing headlines. Something else has been one of the hottest news stories over the past six months. I’m talking about the selective legalisation of marijuana (or cannabis).

As AAP reported in February:

The Federal Government has given the green light for approved companies to legally import, store and sell the drug until domestic production meets local needs.

The move will make it easier for patients who now must go through a lengthy process to get cannabis from overseas once prescribed by an authorised doctor.

Some estimates say that medical marijuana alone could be a billion dollar-plus industry.

The liberalising of laws could be of great benefit for those with a medical need for the drug. But it could mean more than that.

It could be what colleague Sam Volkering calls the biggest investment opportunity of the decade. Sam covers the full story here.


Editor’s note: The above article is an edited extract from Port Phillip Insider.

From the Port Phillip Publishing Library

Special Report:Marijuana Mania’ News.com.au is calling it Australia’s ‘next billion-dollar industry’. Our investigator calls it the biggest ‘legal drug deal’ in history… Don’t miss a cent of it.

This ground-breaking medical mega-trend has already spawned levels of wealth we haven’t seen since the tech boom of the early 2000s. Jaw-dropping stock gains like 1,380%, 1,102% and 13,627%! If you’ve got the guts — and a few coins in your pocket to play with — this mega-trend has the power to potentially nab you a ‘high-bagger’ gain of 1,233% by this time next year. But only if you act NOW… [More]


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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