Investors who bought into the Snap Inc. stock are learning a lesson about radically overpriced stocks
Snap Inc. Went public in March, rising 44% on its first day of trading and, despite having “horrific” financials it earned a market capitalization of roughly $30 billion.
However, Snap reported a net loss of $514 million in 2016 with a comparatively low $404 million in profit in 2016.
The first quarterly report issued by Snap reflected similarly low revenues, with revenue per user declining 14% and daily active users rising by a paltry 5%. To no one’s surprise, the stock simply tanked.
An NYU professor declared that purchasing Snap stock is “like driving drunk . . . [it’s] the most overvalued company in the world.”
Investors hoping to recuperate their investment shouldn’t get their hopes up – the company is valued at $18 billion, and stock has now plummeted below IPO price.
Snap is deemed by analysts to be worth a little over $6 billion, if you use the same price-to-sales ratio as Facebook – one third of the current market capitalization. From this analysis, it is clear that Snap stock based on current patterns has “nowhere to go but down”.
If you assign Snap the same price-to-sales ratio as Twitter, Snap would be worth just $2.3 billion.
Potentially insurmountable problems ahead for Snap
One of the biggest issues Snap is facing is the fact that fundamental features of the Snapchat application are being replicated by other social media sites.
Instagram, owned by Facebook, introduced the feature Instagram Stories – which now has 250 million daily users compared to Snapchat’s 166 million.
Although Snap has been struggling to innovate new features, such as Snap Map, it is highly likely larger social media giants will adapt and copy new features too.