Snapchat’s parent, Snap Inc., saw its stock jump by 60 percent in its first two days of trading, but has plunged by $14 billion since Friday’s close.
The Zero Hedge blog reported that the five of the first seven Wall Street analysts to rate Snap, Inc. (SNAP: NYSE) expect the shares to crash, and only two believe the shares are an average hold. The barrage of cold water on Snapchat’s future prospects before the opening of trading on March 7 caused huge waves of traders taking advantage of first day sales to sell SNAP shares short, hoping to repeat the post-IPO stock crashes suffered by other tech firms, such as GoPro, Groupon and Zynga.
Breitbart News had warned just days before the Snap, Inc. initial public offering (IPO) that the influential eMarketer semi-annual social media user update, which has a disproportionate impact on marketing budgets of consumer brands, estimated that Snapchat usage only rose by 14.2 percent in 2016. It projected user growth to continue to slow for the next 5 years.
Instead of Snapchat user growth coming from the prized 24-year-and-younger “Generation Z” demographic that advertisers are hyper-motivated to try to reach, eMarketer found that Snapchat was losing its edge in the sector to rival Instagram. The only demographic in which eMarketer was seeing strong growth was among the parents of Gen Z.
Breitbart News also reported that despite demand for the new IPO shares, the company chose to not raise the price of the offering above $17. As a result, Snap was seen as the hottest tech deal since the 2014 IPO of Alibaba Group Holding Ltd. The offering contrasted to Facebook, which almost doubled its IPO stock price in 2012, only to see the stock price collapse by 47 percent over the next 90 days.
It is very difficult to project future earnings prospects regarding virally hot social media companies. But while Twitter and Facebook completed IPOs at about 20 and 13 times forward revenue, Snap is trading at valuations over 30 times forward revenue after falling by almost a third.
The Securities and Exchange Commission financial disclosure statement for Snap, which calls itself a “camera company,” showed an extraordinarily strong monthly revenue per user growth that tripled from $.31 to $1.05 over the last year. But the company’s monthly user acquisition cost skyrocketed from $.71 to $1.29 over the same period.
Snapchat’s current stock market price level may or may not be rational. But as economist John Maynard Keynes cautioned a century ago: “The market can stay irrational longer than you can stay solvent.”