Judging by the early results, the Snap (SNAP 6.70%) IPO has been a resounding success.
After pricing at $17, Snap shares soared on their first day on the market. Their first-day closing price of $24.48 furnished the vanishing-video pioneer with a $34 billion market capitalization, greater than that of corporate giants such as Marriott and Target. Of course, the stock has since pulled back to about $21.40, giving Snap a $24.8 billion market capitalization. But it's still above its initial $17 IPO, which factored in enormous growth expectations on its own.
Image source: Snap.
Despite the enthusiasm, though, a growing chorus from the analyst and investing community has critiqued Snap shares as unjustifiably expensive.
To get a better sense of how various individuals viewed Snap's investing opportunity, we recently conducted a Twitter poll to gauge where investors see its shares trading in 12 months' time.
Where will Snap stock trade next year?
Evidently, investors don't think very highly of Snap's value proposition at its current stock price. Here's how the results broke down from the Twitter poll, which we conducted on Snap's IPO date last week.
POLL TIME! Where do you think $SNAP #stock will be 1 year from today?#SNAPIPO #OhSnap #SNAP #snapchat
— Andrew Tonner (@AndrewTonner) March 2, 2017
Even though we got only 106 responses, it's telling that a majority believe Snap's stock is ripe for a fall.
It's also important to note that the poll focused on a one-year time horizon. Shares of recent IPOs often come with dramatic supply and demand imbalances that smooth out in the ensuing months as shareholder lock-ups expire and more shares become easier to buy and short on public exchanges. As such, a one-year window seemed appropriate for this discussion since, presumably, many of those possible imbalances will have dissipated by that point.
Snap stock: Pros and cons
The old investing expression that you can "love the company but hate the stock" captures my thinking on Snap. The basic arithmetic underpinning its valuation tells me that Snap is far overvalued. However, that isn't to say I doubt the company's long-term prospects.
In the here and now, it's impossible to look past the company's valuation. As an analyst, investor, and writer who looks at growth stocks all day, I'm no stranger to seeing companies whose valuations are based more on their potential than on their financial fundamentals. To put Snap's outrageous valuation in context, here's how several of its valuation metrics compare with Facebook, Twitter, and the S&P 500 index.
| Price-to-Sales | Price-to-Earnings | Price-to-Book Value | |
| Snap | 61.1 | N/A | 11.8 |
| 14.3 | 39.2 | 6.7 | |
| 4.4 | N/A | 2.4 | |
| S&P 500 | 2.0 | 26.7 | 3.1 |
Data sources: Yahoo! Finance, multp.com.
The numbers speak for themselves: Snap is overpriced. The current numbers assume the company is on its way to becoming the next mass-market social-media platform, akin to Facebook. Instead, its user base and user growth rates are far closer to that of Twitter. For that reason, I agree with our Twitter poll respondents that Snap shares should fall dramatically over the next year.
Again, that doesn't mean I believe Snap can't succeed over the long term. In fact, Snap's full-screen video ads and sponsored filters should allow it to create a profitable ad business. If there is an issue, it's with Snap's user base, which it will need to meaningfully grow if it ever hopes to support a valuation in the tens of billions of dollars, as it does today.
Of course, achieving that goal will also require Snap to continue to innovate on the product front. Doing so will take time, and it seems plausible that Snap's shares are due for a correction in the intervening months or years. So for those thinking of buying Snap shares as the hype around its mega-IPO continues, remember the phrase "Buyer beware."
