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With SNAP Now Trading in the Single Digits, is it a Buy?

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It’s been a rough week for social media stocks with shares of Facebook (FB - Free Report) falling 5.7% to $162.52/share and Twitter (TWTR - Free Report) losing 11.2% to $30.81/share.  Representatives from both companies testified before the Senate Intelligence Committee on Wednesday to answer questions primarily about the use of their respective platforms to spread disinformation, especially in an effort to influence the U.S. election process.

Investors were apparently spooked by the prospect of increased government oversight of their services, the possibility that costs will rise and earnings suffer as a result of significantly increased efforts to combat intentionally misleading posts and the effects on daily and monthly average users as a result of the companies having forcibly deleted “millions” of fake accounts on both platforms.

Snap Inc (SNAP - Free Report) , parent of the popular Snapchat messaging service has had an even rougher go of it lately, dipping below $10/share for the first time since its March 2017 IPO to close at $9.80 on Thursday. SNAP shares have now lost more than half of their value since hitting a 52-week closing high of $20.75/share in February and are trading at only a third of the all-time high right after the IPO.

Snap’s Q2 earnings report looked promising, with $262M in revenue representing a 44% increase over Q2 in 2017 and a loss of ($0.14)/share slightly beating the Zacks Consensus Estimate of ($0.17)/share.

Guidance was disappointing, however, with the company expecting revenues of between $265 and $290 million in Q3 which is at least 27% higher than Q3 2017, but also expects a net loss of between $160 and $185 million, essentially the same of the year ago period when they posted a loss of $179 million.

Analyst expectations for 2018 earnings have risen lately on 9 upward revisions in the last 30 days, though the total magnitude of the change is fairly modest with the Zacks Consensus Estimate rising from a loss of (0.60)/share to a loss of ($0.56)/share. SNAP is currently a Zacks Rank #3 (HOLD).

Though still very popular with millennials and teen users, growth in average daily users slowed in the quarter to 188M, lower than Q1’s 191M, possibly due to an unpopular functionality change earlier in the year that was almost universally panned by users.

(Editor’s note: My teen daughter badly want a Facebook account for a lonng time, but couldn’t sign up until she turned 13. After that birthday earlier this year, she told me that she was no longer interested, “because Facebook is for old people, all my friends are on Snapchat.” Hearing things like that are certainly an eye-opener for an investor, but as far as I can tell, she has purchased exactly zero dollars worth of merchandise from Snap’s advertisers, causing me to doubt somewhat their ability to monetize their popularity. Yees, I'm aware that an anecdote that includes a sample size of "one" dooes not constitute sound financial analysis.)

Snap also unveiled an updated version of its “Spectacles” sunglasses which allow users to take pictures and videos from a fairly traditional-looking set of glasses (and which call also show advertising), but they replace the previous disappointing Spectacles product and it remains to be seen whether snapchatters will warm to the product in its current iteration. The company took an inventory-related charge on Spectacles of almost $40M in 2017.

On one hand, Snap is an interesting speculative prospect as a very popular social media platform that’s trading at a very low share price, yet because it’s spending more than $200M in cash a quarter and has yet to post a profit, the company has considerably less margin for error as it faces headwinds in the social media space. If new products and services take off, it could provide a great long-shot return. If it fails, however, the shares could languish at a low price for a long time.

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