In 2017, Snap (NYSE: SNAP) was one of the hottest IPOs of the year and was the largest to hit the markets since Alibaba went public back in 2014. The camera-based app has proven to be a hit with young users, and that’s made Snap a popular platform for advertisers seeking to reach younger audiences. However, with the company facing some major problems, its stock has sent investors on a bit of a roller-coaster ride.
Stock is still not at its IPO price
Although the stock was initially priced at $17 a share, it actually began trading at $24. It was a great early profit for investors who were able to buy at the lower price, but for the vast majority of us, $24 would’ve been the price available at the open. A $10,000 investment would have been enough to buy 416 shares of Snap. As of Friday’s close, shares of Snap were trading at just $15.26, more than 36% below its opening price. If you had invested $10,000 in Snap on Day One, your shares would be worth just $6,348 today.
While it’s a sobering realization for people who might have expected Snap to be the next big thing in tech, investors could have lost a whole lot more had they sold their shares back at the end of 2018 when the stock was trading below $6.
Image Source: Getty Images.
What has gone wrong for Snap?
Snap’s shares have struggled over the years for a couple reasons. The first has to do with the company’s growth. While there’s no question that Snap is a popular app, there have been questions regarding whether the company misled investors about its growth potential and the danger that Facebook poses to its business.
Questions surrounding Snap’s user base were growing in 2018, when the app started to see its daily active users (DAUs) not only stall but even decline. Without a growing user base, it would be hard to convince investors that the stock was investable, especially since the other big problem for the company was its poor financials.
Breakeven nowhere in sight
Although Snap’s sales have risen significantly over the years, from $59 million in 2015 to $1.5 billion over the past 12 months, the problem is that the company is actually farther away from breakeven today. In 2017, its losses reached a peak at more than $3.4 billion, and while that came down to $1.3 billion in 2018, it’s still been a massive problem for Snap. The company has been burning through lots of cash along the way, with free cash flow being more than negative $800 million in both 2018 and 2017.
Recent turnaround still has a long way to go
The good news for early investors is that Snap has recovered in 2019 in a big way. The stock has risen more than 160% year to date, and in its most recent quarter, it posted a loss of $227 million. That was a sizable improvement from the loss it incurred a year ago, which totaled $325 million. And thanks to a redesign of its app, Snap has been able to see growth in its DAUs in recent quarters as well:
Image Source: Snap.
The big test for Snap is whether the company can continue to build on these results. It’s going to need more good performances in order to be able to convince investors that it’s an improved company. Getting back to its IPO price could prove to be challenging, because the stock is still an expensive buy today, trading at 9 times its book value and around 14 times its sales.
Investors who bought the stock at the IPO and managed to resist selling it during the lows of 2018 might as well continue holding on to see if Snap can prove that its recent results are just the beginning of a much bigger recovery. After all, the company’s ability to hold its own against Facebook’s efforts to copy its features should provide some confidence to investors.
The tech stock is still a risky one to hang on to today, but it’s nowhere near as concerning as it was a year ago.
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