Will the Stars Align for Snap Inc?

By Motley Fool Staff Markets Fool.com

The Motley Fool Moneyteam shares their take onSnap (NYSE: SNAP)following the massive gains the stock has enjoyed since pricing its IPO at $17 per share. As the biggest tech company debut since Alibabawent public in 2014, investors want to know: Does Snap deserve its valuation, and if so, how can an investor tell?

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A transcript follows the video.

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This video was recorded on March 3, 2017.

Chris Hill: Snap wentpublic on Thursday at $17 a share, andquickly shut up more than 70% as it closed in on a market cap of $34 billion [having since declined to about $27 billion]. It is the biggest techIPO sinceAlibabawent public in 2014. You tell me, Ron, is thisexcitement and enthusiasm? Oris this madness?

Ron Gross: I hate to rain on everyone's parade,this is ridiculous to me,literally ridiculous. But there are more people who are optimistic thanpessimistic,because we see the stock continue to rise. The company is not profitable. I guess a billiondollars ain't what it used to be. The big deal here for me is there is slowing user growth here,and they really need to turn that around. I saw one analyst estimate that said they'll need to grow, for the next ten years, at more than 50%every year with a profit margin of25% to justify the current valuation.I don't see it happening. Andunless you are a social media expert and can look out five or ten years down the road atwhat the landscape is going to be andwhat Snapchat can possibly do,then you have no businessinvesting in this company. And,I don't want to tell people what to do,it's a free country, but it'sgambling unless you have that insight.

Jeff Fischer: Somestrong words, and I don't disagree with Ron, really. Like many IPOs,you are gambling. It's like trying to predict the weather three to five years from now -- you can't do it. But some of the markers are there, which is, as Ron mentioned,my biggest concern is user growth, as well. It only grew7% and 3%, respectively, the last two quarters. That'sclose to nothing. They have 160 million daily users.Facebookhad 520 million daily when it went public. That said,you often hear about the demographics. These are mostly 18 to 24 year olds. But, so far, Snap isonly making $1 in revenue per user per quarter, and theirexpenses far outweigh that. So it's going to be losses from here forat least a couple years going forward. And, you know, Chris,sometimes you go public because you have the cat by the tail andyou need the money to reallypush on the accelerator, and that'spart of the situation here. But you also sometimes rush to gopublic because your metrics are slowing,and you want to get out the door before that really happens. I think it's a combination here. User growth of thatslow magnitude speaks something ofTwitter.

Gross: "Thatslow magnitude" ... I'm going to coin that phrase.[laughs]

Fischer: It'shard to talk live real-time. When user growth is slowing that much,you're not Facebook, you're looking more like Twitter.

Hill: Yeah. Jason,good reminder that Jeff just touched on --when a company is getting ready to go public,they want to look as good as possible. They want their booksto look as good as possible. So this isabout as good as it could get for Snapin terms of their financials up to this point.

Jason Moser: Yeah,I think so. It was interesting, there was a point in time with the roadshowleading up to this, I'm not sure how many people caught this, but when asked about that slowing user growth -- andEvan Spiegel, one of the co-founders of the company,actually blamed Android hardware, saying that theycouldn't keep up with the nature of Snapchat's app, the way it's quick, and video, and veryrobust platform,kind of have a hard time making that leap right there. But I think, if you'relooking for user growth,I don't think you're going to find it here.I'm sure they will continue to grow users at a relatively modest pace, but I think the concern here is that this is a very nicheplatform with a limited audience. It does something really well, but I think itdoes it for a much smaller audience out there than,perhaps, some might like to believe.

If youlook at it from a glass half fullperspective, it really caught all of our eyeswhen they reidentified themselves as a camera company, right? That was what really made us think, what? Becauseit was Snapchat,we knew it was Snapchat, they changed their name to Snap and now they're a camera company,and they think they can reinvent the camera. Good luck with all that, that's fine,I appreciate that. But maybe that's a bit of self-realization there -- they even know that they'renot going to be able to really justify this valuation, theseexpectations, just on being that Snapchat app alone. AndI think what we have seen in this space, andFacebook has certainly proven this out thus far, is that really, the best strategy to win here is to become that portfolio of appsthat a lot of people use. Facebook is not just Facebook, it'sFacebook, it's Instagram, it's WhatsApp and whatnot. I think the bigger question, then, becomes is Snap the kind ofcompany that will be able to go acquire other smaller companies, bring them into the fold? Are theygoing to be seen as an attractive partner? I think the jury is still out there. But there are some signs, at least, going into this that theyprobably still have some lessons to learn.

Fischer: Yeah, and their growth slowed asInstagram launched Instagram Stories. The competitive landscape isenormous, and you're up againstsome very well-monetizedand smart competitors. And at 160 million daily users, you'renot really at critical mass yet,in my opinion, you're not that much bigger thanMyspace was back in the day. You could still see that user base decline. That said, Chris, most hot IPOs over time are called overvalued. The stories are out there,I won't name names, buteveryone criticizedAmazonandGoogle. And in the end, many IPOs go on to create great returns,whether it wasMastercardor Google/Alphabet, Amazon, Facebook. But many more have been disappointments.

Hill: I was going to say, some of them go on tobecomeGroupon.

Fischer: [laughs] It'll beinteresting to see where this one lands. But it sounds like the table is on theskeptical side.

Hill: Someinvestors were so excited to pull the trigger on Snap'sIPO that they ended up buying shares ofSnap Interactive, whichtrades under a different ticker symbol, anddoes not, in fact, operate adisappearing photo app. Snap Interactive is anover-the-counter micro-cap share, which spiked on Thursday and promptly fellback to earth when investors realized their mistake.

Gross: Wow. IsSnap Interactive profitable?

Hill: Well, they have a market cap of $40 million.

Moser: But they're interactive. That just sounds so modern day.

Fischer: That justspeaks to how so many people still view the market as aspeculative gambling place. That's sad to me. It makes me sad.

Hill: Slow down, people!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors.Chris Hill owns shares of Amazon. Jason Moser owns shares of Twitter. Jeff Fischer owns shares of Alphabet (C shares), Amazon, Facebook, and Mastercard. Jeff Fischer has the following options: short March 2017 $129 puts on Facebook. Ron Gross owns shares of Alphabet (C shares), Amazon, Facebook, and Mastercard. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Mastercard, and Twitter. The Motley Fool has a disclosure policy.