Is Snap Inc a Buy?

By Motley Fool Staff Markets Fool.com

In this segment fromIndustry Focus: Tech, the cast makes their final case for Snap(NYSE: SNAP)and some of the key developments investors will want to watch as they track the company's progress. At this early stage, it will take time for both advertisers and consumers to figure out the best way to navigate the platform.

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A full transcript follows the video.

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This video was recorded on March 31, 2017.

Dylan Lewis: Reading through the buy ratings, I will say, even as someone who has been a bear for quite some time, I can see it. There are certain elements of Snap that are very interesting. You talk about increasing the ad load. The user growth stuff still terrifies me. But you see the success that Facebookhas had as an online business, and it starts to creep into your head, "Maybe I've been a little too pessimistic on this." Then I come back to valuation, and I'm like, "Nope, I'm staying away from this for now."

But I am forcing myself to be a little bit more open-minded with this company and say, if the valuation drops to something a little bit more reasonable, I might give it a look. But for me, it's always good to read what people who take the other side of a stock feel, because it forces you to balance out your opinion. It hasn't dramatically changed anything for me. I don't know about you, but it doesn't sound like it.

Evan Niu: No, I'm still pretty skeptical. Another thing to think about is, a lot of the spending that's going on on Snapchat, from my understanding, it's a lot of experimental budgets from advertisers, because they're trying to test the waters, because they know Snapchat has this huge base among millennials, which are hard to reach. So, they're trying to see if they can get return on their advertising dollars there. But now, the onus is on Snap to actually deliver results on those ads. Millennials have this practiced apathy toward ads in general, which is why it's so hard to reach them. If Snap is unable to actually deliver results, that ad spending is going to dry up pretty quick.

That being said, it's important that Snap is such a young platform. So, it's hard to know. They could kill it, but they can also totally screw it up, and you just don't know yet at this point. I do think it's a little disconcerting that Evan Spiegel is reportedly really adverse to data-driven decision-making. He relies more on experience. If you want to pitch him something, you tell him how the users will feel, what they're going to experience. You don't give him numbers. Which is weird, because advertising businesses are fundamentally all built on data -- they're all numbers games.

So, it's this weird thing like, why aren't you taking the data more seriously? Facebook itself has had some missteps over the past six months or so regarding their ad metrics, and they're getting a bunch of crap about, their metrics aren't good, their data is not good, which is extremely important to advertisers. So, again, it calls into question the risk, and how well they can actually develop this completely new ad business that they've never really done before. So, yeah, I'm still pretty skeptical overall, I would say, despite these buy ratings.

Lewis: Yeah. On that note, with advertising and execution, I think if you're looking for signals, and you use Snap and their products, one thing to watch for is whether the ads you see on there drive you to something, and whether it's a transaction, or to consume content, or something like that, or if it's brand presence stuff, because the ad placements that will drive you to some sort of call to action that gets you to sign up for something, or puts you in a situation where you can buy something -- those will always command a premium. There's always going to be room in advertising budgets for brand presence and just being in front of consumers. But anything that can actually drive you to a consumer decision is going to command a much higher value in ad budgets. That's really where I think a lot of spend is going to go.

That's something that Facebook has done incredibly well, in showing the ROI to advertisers, and showing, "We're not just going to have your products up there and people can like them, we're going to be able to get you into a position where people are going to be buying things." So, as a consumer, that's a way to have the finger on the pulse of [the] success of Snap and their advertising business as they roll it out.

Dylan Lewis owns shares of Facebook. Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.