Snap Inc Has a Lot to Prove After Its First Earnings Report

By Motley Fool

In this segment ofMotley Fool Money, the castdiscusses the dismal showing from Snap's(NYSE: SNAP) first quarterly report as a public company. CEO Evan Spiegel has much to learn about the difference between running a public versus private company, and even at the reduced valuation, Snap has a lot to prove.

A full transcript follows the video.

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*Stock Advisor returns as of May 1, 2017

This video was recorded on May 12, 2017.

Chris Hill: This week,Snapissued its first quarterlyreport as a public company,and the reaction from Wall Street was one of abject horror. Snap lost more than $2 billion, anduser growth was weaker than expected. Jason, CEOEvan Spiegelfinding out this week something that we have saidon the show before --running a public company is harder thanrunning a private company.

Jason Moser: Sure. Cue theephemeral profitability jokes. I guess, really, that'snot applicable here, because there was no profitability to begin with,not that that's any real surprise. They have a ways to goto actually get there. I think the good news for Snap at this point in time, this was the first call, and they have an opportunity to learn from their mistakes and to get better. I think the bad news ispretty much everything else about that call.

Hill: [laughs] The conference call?

Moser: AndI listen to it.This is one where you don't want to read thetranscript, you want to listen to it and hearhow this team sounds,how they work together,what they're talking about. I don't know thatEvan Spiegel does himself any favors bytrying to hold his cards so closeto the vest. Thatultimately is what you got from this. No. 1,I think he has probably fallena little bit from his own height. No. 2,he's not really willing to give upso much information as far asplans for the company, aroad map to profitability,products they have, features, whatever it may be. So the market,everybody is essentially stuck here wondering: What exactly is this business, andwhat kind of growth can we expect from it? Because,certainly the numbers wereless than everyone was expecting when it comes to revenue growth, when it comes to user growth. There are some big questions here. And it's reasonable to assume that they'regoing to have some issues getting there, because Snapchat is a nicheplatform.

The reallybad news for investorseven after this big sell off this week is that the stock is stillabsurdly overvalued byvirtually any metric. If you look at it from a [price to sales] perspective --we can't look at it from a [price to earnings],because there are no earnings yet -- the stock is still trading at 41 times sales. Youput that into perspective,Twitteris trading at less than 6 times.Zillowis trading at less than 9 times. Andthese are two businessesalso very much internet-based,non-profitable businesses. So I think those are pretty goodapples to apples comparisons here. Theexpectations on Snapright now are just absurd. I fear that investors who are thinking, "We'lljust wait this out, ormaybe buy on this dip,"I really don't see a scenario where this stockdoesn't get cut in half from today's level.

Seth Jayson: Snapdoesn't really, I don't think, pass the "what would happen ifif we're gone tomorrow" test. We talked about this with some of these stores.

Ron Gross: Mykids would be a little upset.

Moser: They'dget over it the next day.

Jayson: They'd juststart pasting stickers on Facebook, andchat on their iPhone or whatever. I mean, yeah,they have a pretty big user base. Butwhat they're selling is not reallyanything all that differentiated.

Gross: I hate seeing them missand report disappointing numbers so close to an IPO. Theroadshow was just a minute ago, and the guidance to the Street was a minute ago, and to come out and say, "Yeah,I guess our visibility wasn't that good,"it's just disgusting. To see the stock get hit like this, whichis appropriate, it should never have been at that valuationin the first place, it's just not appropriate.

Moser: Yeah. AndI don't want this to just be a gang up on Snapchat -- I do think there ispotential there. Obviously, they've built upsomething that a lot of people out there like to use. Its corefunction as a messaging app is very replicable, and we've seenFacebook put upcopies of that and do pretty well with it. So I think the key for Spiegel is going to be, No. 1,learning how to behave as a CEO. He's26 years old. I remember when I was that age, youthink you know it all. Obviously he doesn't. He'sgoing to figure that out as he goes along. But I think the otherquestion thatneeds to be answered is, what else are theygoing to become? They can't just be Snapchat, they have to figure out a way to be special, to be unique, to offersomething that no one else does.

Jayson: Glasses, thecamera glasses.

Chris Hill has no position in any stocks mentioned. Jason Moser owns shares of Twitter. Ron Gross owns shares of Facebook. Seth Jayson has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook, Twitter, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.