Does Snap Inc Stack Up Against Its Social Media Brethren?

By Motley Fool Staff Markets Fool.com

In this segment from Market Foolery, Chris Hill is joined by Motley Fool analystsAaron Bush and David Kretzmann as they reflect on the bullish opening trades of Snap (NYSE: SNAP): from an initial offering price of $17 per share, the stock surged above $20 and has remained at these elevated levels after its first full week on the market.

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Based on most common metrics, this is a pricey stock, which leads to the obvious question: With the company priced to perfection and logging significant losses, what will set Snap apart from its social media competition?

A full transcript follows the video.

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This podcast was recorded on March 2, 2017.

Chris Hill: Let's start with Snap. Snap goes public at $17 per share. It opens for trading to regular investors like you and me at about $24.50. If you're scoring at home, that's a 46% increase right off the bat before regular investors can get in. At that point, Snap's market cap is $33 billion, which puts it in the top third of companies in theS&P 500. I don't know where to begin, David. This is, partly,madness. It's certainly exuberance, this is what exuberance looks like. This is also what it looks like when you haven't had a tech IPO in a couple of years.

David Kretzmann:Yeah, I think people are excited. This is one of the bigger IPOs, certainly, in tech, that we've seen in a couple years. So Wall Street is clearly excited today. All rationality is going out the window for a day or two, most likely. It's interesting to take a look at how Snap today compares toFacebook(NASDAQ: FB)before the IPO. Obviously, Snap is a younger company going public today than Facebook was at the time it went public in 2012, but there are some similarities here, where you can see the opportunity or potential for Snap.It's still more of a stretch, I think, for Snap to succeed from here and really reward investors. But just looking at something like average revenue per user. At the time Facebook went public, its average revenue per user was $1.21. For Snap, it's $1.05. So, pretty close there. The main difference for Snap, and the reason the company is losing a ton of money right now and its losses are increasing, its cost per user is above $2, while Facebook's cost per user was more like $1.25. So, Snap now has even higher expectations. Whether or not the company can become profitable is something that they themselves question in the S-1. They say, "We might not ever be able to reach profitability." So, there are certainly a lot of question marks with Snap. It's a riskier company, very high expectations, and still a very limited operating track record that investors can work with.

Hill:I suppose you have to give them bonus points, Aaron, for just coming out and saying, "You know what? We might never be profitable."

Kretzmann:At least they're admitting it.

Aaron Bush:I do think that cost per user number issomething that's going to prove to be one of the most important metrics that investors need to be looking at. When I read through the S-1 prospectus, I was starting to piece together that what management thinks is their competitive advantage isn't really thenetwork that they have built, it's not necessarily the uniqueness that Snapchat has created, but rather it's their ability to innovate rapidly and always be one step ahead of the competition. And that's a very different kind of story thanyou hear from other social media companies.Twitter(NYSE: TWTR) is "we are live". Facebook wants to connect the world and that kind of thing. On one hand, this is good, because it's going to keep Snapchat out of the trap that Twitter fell into where product innovation stalled. If anything, with Snapchat, we've seen an acceleration in the number of new features and stuff that they have thrown out. So that will help them, definitely, stay relevant and improve engagement, and that engagement should lead to higherrevenue per user and that kind of thing. But that does come at a cost. And that's just yet another hurdle to overcome. And when Snap says that they're a camera company ...

Hill:Ugh.

Kretzmann:I cringe.

Bush:That's theirleading statement for everything, "Snap is a camera company." It's like, what?!

Hill:It's like, why are you saying that out loud?

Kretzmann:Wasn'tKodaka camera company? How did that turn out?!

Bush:So, I think that's an important thing to be thinking about, what exactly that means. I think for Snap, that means that the evolution of the camera is real, and Snap is driving that. It means that software is playing a bigger and bigger role in what camera technology is doing in connecting people, and having people engage with each other on a mobile basis, augmented reality filters, all that kind of stuff. But it also means that they're probably going to be stepping more into the hardware game. They've already done that with Spectacles. I still don't really know what I think about that.

Hill:TheSpectacles are literally just glasses.

Kretzmann:Glasses you wear, they take the 10-second videos that automatically upload to your Snap account. They cost $130. So, it might draw some comparisons toGoogleGlass. But obviously much more affordable, has a much more direct use case. So far, I think you have seen broader adoption, even at this early stage, compared to Google Glass.

Bush:Yeah, and I think Evan Spiegel in general has constantly been an underrated CEO. He probably is a really brilliant product guy. So, for Spectacles, that obviously is a better thing than Google Glass was, and I think we will probably see the hardware portfolio expand, as well. I don't really know what that's going to look like. But I get the sense that things are going to be moving more in that direction as well.

Kretzmann:Yeah, design and innovation, that's the name of the game for Snapchat. And like Aaron mentioned, I think a lot of that starts with Evan Spiegel, who does have a very solid reputation of being a designer and an innovator, a product guy, in Silicon Valley. But I take a step back and I think, there was a reason that Facebook and Mark Zuckerberg were very interested. At first, they tried to compete with Snap. Zuckerberg actually flew down to Los Angeles in 2011 and met with Evan Spiegel, and he said, "Here's what I would do if I were Snap, and by the way, Facebook is going to try to do this." And then, a year or so later, Facebook offered $3 billion to acquire Snap. And Spiegel and Snap turned it down without thinking about it, and they got a good amount of heat from investors and the press for that. And here they are worth 10 times what Facebook offered for them a few years ago. So, there is something there, especially with Spiegel.

I think that leadership factor is a huge piece of the valuation today, and those high expectations for Snap. And Chris, you and I were just at the member event that we had an Arizona,and you talked to Brad Stone, whose new bookTheUpstartslooks at the early days ofAirbnbandUber. And there was a quote that I thought was very relevant to how to think about Snap. This was a quotes from Fred Wilson, who was an early Twitter backer who passed on Airbnb, and he said that his mistake -- this is his direct quote: "We made the classic mistake that all investors make -- we focused too much on what they were doing at the time, and not enough on what they could do, would do, and did do." I think with Snap, you really have to look at the bigger picture. This is expected to be the first year where digital advertising spend exceeds TV marketing. That's a pretty big milestone, if that does happen this year. And Snap is really trying to capture those dollars that are shifting from TV advertising to digital advertising, trying to reach that audience of 18 to 35 years old, which is really Snap's bread and butter. So I can see where the company is in a really interesting position. They have some tailwinds, potentially, behind their back. They have a very innovative CEO. But yeah, the costs are very high, they're expected to keep going higher. So the company probably won't make money for a long time.

Bush:Yeah, and to give some final perspectives, on anumbers basis, when Facebook IPO'd, it came out with pricing about 28 times sales. Twitter was priced at 56 times sales. Snap, right now, at $33 billion, is about 80 times sales. [laughs] That's a high number. I would also keep in mind that today, Twitter, just to keep the comparison going, has $2.5 billion in sales, which is about eight times what it had when it IPO'd. And the stock, today, is trading for significantly less than it was when it IPO'd. Where it is right now, about $11 billion, is one third where Snap is right now. So, Twitter made all that progress, but here Snap is in the same boat.

Hill:Would you rather have all of Twitter or one third of Snap?

Kretzmann:I'd actually probably go with one third of Snap right now. I would take that gamble on Spiegel. I just like the leadership and the vision of Snap a lot more than Twitter right now. It's obviously a riskier bet, but I think Snap, right now, with the leadership, is a bigger idea than Twitter.

Hill:Aaron?

Bush:I'd take Twitter, but getting creative, I think if I can take 100% of Twitter, you can have some more control, and then I could make a deal to figure out how to work things out with Snap.

Kretzmann:Aaron Bush, new CEO of Twitter.

Hill:There are worse ideas. Let me go back to Spiegel for a second, just because here at The Motley Fool, one of the things we focus on is leadership. There are a lot of people going into this IPO -- speaking of Facebook and Twitter -- using those two companies as comparison points. Like, this could be the next Facebook. It could also be the next Twitter.People are saying that not as a compliment, in terms of the IPO. As you said, Aaron, Twitter's value today is about one third less than it was on the day that it went public. But, if you think back to when Facebook went public, there were questions about Mark Zuckerberg. Completely fair questions about both his age and his experience. That's where I think the comparison to Spiegel is apt. As I said, these were fair questions. Here's this young person. What kind ofpublic company CEO is he going to be? I think that's the thing we will only find out with time. With the case of Facebook and Zuckerberg, you could point to people like Sheryl Sandberg, or other people in the management team, also a bigger and more mature company at the time. But you could see other people and say, "OK, whatever kind of public company CEOZuckerberg turns out to be, he has some other steady hands on board there." I don't know who else is on Evan Spiegel's management team. We will only find out in time what kind of public CEO he's going to be. But I think it's perfectly legitimate to say -- and I agree with you, Aaron, he's underrated. To this point, I think Evan Spiegel is not getting quite the credit he probably deserves. But now, it's a brand new ballgame because they're a public company, and they're going to get a report card in three month, and we'll see how they do.

Kretzmann:Really, the main thing that Snap has going for it right now certainly is not its financials. It's leadership and vision. I think the company didn't even start making any revenue until 2015, so just a couple years. That's a very limited operating history. And they have beenscaling that revenue pretty quickly. But that's not a whole lot to go off of. I think it really does come down to the design, theinnovation of Spiegel and that vision. And obviously, Wall Street bought into it on the roadshow. Butthat, right now, is really the main thing investors have to go off of. So that's one of the reasons it's a riskier bet today.

Aaron Bush owns shares of Facebook and Twitter. Chris Hill has no position in any stocks mentioned. David Kretzmann owns shares of Facebook and Twitter. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.