Wednesday marks one week since the largest tech IPO in more than three years. Now, with investors seven days older and (hopefully) wiser, does an investment in Snap(SNAP) - Get Report still hold its appeal?
Snap made its debut on March 1 by raising $3.4 billion and it started its first full day of trading on Thursday. At the end of the day, the company's stock had closed 44% higher than its opening price at $17 per share, giving the company a market value of $28.4 billion--on par with established companies such as Target(TGT) - Get Report and CBS(CBS) - Get Report .
Snap is the company behind popular social media app Snapchat, as well as a venture that makes augmented reality glasses. However, Snapchat lacks the broad appeal that has made Facebook(FB) - Get Report and even Twitter(TWTR) - Get Report worthy of investors' attention. Essentially, the app allows users to send self-destructing photo messages--and that's about it.
The ephemeral nature of Snap's product limits the company's growth ability. The app clearly targets millennials in developed countries, whereas Facebook has room to grow in developing nations, where it helps people collect and disseminate information. Snapchat is merely a time-wasting fad.
On top of that, the company has yet to turn a profit, with a rapidly widening net loss of nearly $515 million in 2016. And Snapchat is beginning to bleed users. During the second quarter of 2016, roughly 21 million people used the app every day. By the third quarter, that number had fallen to 10 million. And in the fourth quarter, there were only 5 million average daily active Snapchat users.
Already, investors are starting to tire of Snap's stock. On Wednesday, shares opened around $22 and closed at $23, still higher than the company's opening price last Thursday but noticeably down from Monday's start above $28 per share.
But analysts are expecting Snap's stock to fall even lower. According to FactSet, the average price target for Snap shares is $16.50. But some analysts, including Pivotal Research Group's Brian Wieser, are expecting it to plummet as far as $10 per share.
The writing is on the wall for Snap--and has been since its overhyped debut. This is a faddish company, and its stock is faddish as well. Investors have only to remind themselves of the carnage from the dot-com bubble, which saw many Wall Street tech darlings crash and burn. Look no further than Twitter--faced with similar monetization and user-bleed problems, the company's shares are now trading nearly 50% below their IPO price.
Investors looking to profit from the popularity of social media should stick with a tried-and-true player like Facebook. Although it's now an elder in the industry, Mark Zuckerberg's company continues to grow in new markets and rake in advertising revenue.
Snap's goofy stock gains will be as short-lived as the goofy picture messages it allows you to send.
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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.
Action Alerts PLUS, which Cramer manages as a charitable trust, is long FB.