Snapchat Spells Trouble for Shareholders but is it a Short?

After posting horrendous quarterly earnings, Snapchat (NYSE: SNAP) stockholders lost 16% on the week. Chances are good that the stock will revisit lows before the end of the year.

Unlike Twitter (NYSE: TWTR), which reported user engagement and activity growth, and Facebook (NASDAQ: FB), which reported revenue improving sharply y/y, Snap lost $0.14 a share. Unadjusted, Snap reported a -$0.36 a share loss. Even as revenue rose 62% Y/Y to $207.9 million, the company could not make money.

The tripling in losses and EBITDA of -$178.9 million was too much for shareholders to bear. Growing the DAU (Daily Active User) base to 178M, up from 153 million should have led to smaller losses. Instead, Snapchat used $194 million, while the negative FCF of ~$220 million should frighten investors away.

Despite the weak financial numbers, Snap is a unique chat app that has a strong millennial user base. This audience willingly spends on experiences instead of materials. Snap caters to this culture. The company could also become a takeover target, which would heighten the risk of shorting the stock as it falls.

Takeaway

Snap’s growth is limited: the U.S. teen and millennials is around 120 million but the app already has 178 million. Without the user growth, Snap’s stock will fall slowly.