When Snap Inc. (NYSE: SNAP), the company behind the wildly popular Snapchat app, went public in March, the overarching question was whether Snap would be the next Facebook (NASDAQ: FB) or the next Twitter (NYSE: TWTR). Facebook has grown during its five years as a public company into a technology behemoth, with a valuation nearing $500 billion. Over the past 12 months, Facebook has generated $33 billion of revenue and an astounding $13 billion of net income, driven by its more than 2 billion users.
Twitter, on the other hand, has struggled. The stock has tumbled nearly 80% from its peak late 2013, and it's down nearly 70% since the beginning of 2015. Twitter's pie-in-the-sky valuation at the time, coupled with performance that has failed to inspire, led to this massive destruction of wealth. Twitter's revenue is now in decline, stuck around $2.5 billion, and the company is posting net losses of nearly $500 million each year.
Shares of Snap are already down 46% from their peak just a few months ago. User growth is slowing, costs are exploding, and the company doesn't seem to be able to combat Facebook's relentless copying of Snapchat's core features. Snap looks a lot like Twitter, in other words, and not a whole lot like Facebook.
But I don't think Snap is the next Twitter. It's much worse.
Hurling money into the sun
I wrote an article in 2015, Twitter Stock Is a Disaster Waiting to Happen, that laid out my case for why Twitter was wildly overvalued. I compared Twitter to Facebook and Google, now Alphabet, when those two companies were roughly the same size as Twitter. The numbers spoke for themselves, showing that both Facebook and Google managed to grow faster than Twitter while turning profits and spending little of their revenue on costs.
I'll reproduce that comparison now, adding Snap into the mix. For Snap, I'll use the trailing-twelve-month figures, and I'll exclude the giant stock-based grants related to the IPO.
Snap isn't as big as Twitter was in 2014, but it's already losing nearly twice as much on an operating basis after backing out one-time stock awards. Costs are out of control: During the second quarter of 2017, Snap spent $255 million on research and development (R&D) and $223 million of sales, general, and administrative expenses (SG&A), both higher than its $182 million of revenue. The company also spent around $400 million on acquisitions over the past few months, an incredible sum given its revenue.
This is happening as user growth is slowing. During the second quarter, Snap's daily active users increased by just 4% from the first quarter. The cost of hosting to support those users also increased, with Snap spending $0.61 per daily active users, up from $0.60 during the first quarter. Snap relies on cloud computing providers for its infrastructure, which means that its hosting costs will rise right along with its app usage.
Analysts expect Snap to produce about $900 million of revenue this year. Even after a steep decline in the stock, Snap trades for around 18 times that estimate. User growth needs to pick up, revenue per user needs to increase significantly, and costs need to stop exploding for such an optimistic valuation to make any sense. Snap's performance as a public company so far should give investors no confidence at all that the company can pull it off.
Twitter has been a train wreck for investors. I'm not sure there's a strong enough metaphor to describe Snap.
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