Second-tier social network Snap (SNAP) cratered today after trying to sneak a stealth revenue guidance revision past Wall Street . . . but the real impact here is what these numbers say about where Silicon Valley’s true giants deserve to trade.
On the surface, SNAP didn’t really tell us much we didn’t already know a month ago when the company issued its outlook for the current quarter. Back then, management felt pretty confident in hinting that revenue had essentially plateaued.
Maybe in the best likely scenario the top line would come in 1.5% above last quarter. In the worst, we’d see a 3.5% sales decline. Over the past month, “the macroeconomic environment has deteriorated further and faster than anticipated” and sales simply aren’t coming in at that rate.
As a result, management now thinks it’s more likely that sales are trending down 4% or more from last quarter. We don’t know how fast they’re sinking, and I think that’s what really scares a market that’s already in a fragile and unforgiving mood.
It could get a lot worse for SNAP before the sun comes out again. That’s bad news for a stock that was always priced for a stratospheric long-term growth curve . . . bad enough for a niche network to cast a cold shadow on giants 60-70 times its size.
Yesterday at $22, SNAP was priced at roughly 8X sales, which is the best metric Wall Street could find to justify the stock as anything more substantial than a novelty. The company wasn’t really sustainably profitable and growth was erratic.
In the COVID era, 8X sales felt almost reasonable for a high-tech upstart with sizzle power. A lot of sexier stocks commanded much higher cash multiples, so every time they broke new barriers, SNAP and its peers naturally rode their tail up as well.
But as we’ve discussed, Elon Musk’s “best and final” offer for Twitter (TWTR) slammed a hard ceiling on the sales ratios. The richest man in the world, apparently completely unencumbered by any tangible business objective, wouldn’t pay more than 8.5X trailing revenue for a new toy.
And with that offer on the table, it was unlikely and even increasingly absurd that any other company could be worth more even in the most perfect scenario. Musk showed us the ceiling and the Twitter board couldn’t accept the offer fast enough.
SNAP, with similarly nebulous business prospects, could aspire to that kind of valuation under the right conditions. Management is young and innovative. They’re looking forward to generating a big payout in the long term.
Unfortunately, Wall Street isn’t thinking about the long term right now. All investors see is the short-term sales stall . . . and a sell signal. Suddenly that 8X stock is trading at 5X sales at best.
I think that’s still too high for comfort in this market environment. I am not buying the dip. SNAP still reflects too much confidence in the future and, more importantly, too much upside that shareholders have already enjoyed in the past.
The stock came too far on hope. Now it’s too expensive to face the future. Under normal conditions, big stocks like this (and even at “only” $20 billion, SNAP is no baby start-up) are content to trade at 1.5-2X sales, adjusted for profitability and growth where appropriate.
SNAP isn’t profitable and it isn’t even growing the top line. I wouldn’t be surprised to see it hit $6 again before management proves they can turn the numbers around.
But here’s the thing. Apple (AAPL) still commands roughly a 6X sales multiple. Granted, Tim Cook’s accounting wizardry keeps earnings per share moving in the right direction, so maybe it’s worth a little more than SNAP.
Alphabet (GOOG) is in similar valuation territory. Tesla (TSLA) is at 11X sales right now. Elon Musk would not buy his own company at this price, even on a whim. That’s very bad news for shareholders.
NVIDIA (NVDA) at 16X sales . . . Adobe (ADBE) at 11X . . . they’re profitable and expanding, but they aren’t cheap here, either. And that’s just the top of the food chain, the biggest tech companies trading at levels SNAP couldn’t support.
Keep your powder dry and keep your cool. Opportunities are coming, but we’ll need to dodge a few more explosions like this before the COVID market fever breaks.