3 Reasons Why Snap Stock Is a Strong Sell Right Now

Stocks to sell

Snap (NYSE:SNAP) has defied expectations over the past quarter. SNAP stock has doubled from its low, with shares surging from $5 to $10 this year. Many traders seems to believe that Snap has finally turned things around after its terrible run since the IPO. On Tuesday, research firm Consumer Edge added to this positivity, giving SNAP a healthy $14 price target.

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Let’s not get ahead of ourselves though. One quarterly earnings report (and not even an especially great one) hardly changes Snap’s longer-term outlook.

Snap will need to deliver several such better quarters before there would be reason to think that this turnaround has a chance of sticking. Here’s why you should avoid SNAP up at $10.

Insider Selling

The first reason to be concerned with SNAP stock’s recent rally is that insiders are unloading their shares. The most important player here, of course, is CEO Evan Spiegel.

As of November 2017, Spiegel owned 85 million shares of SNAP stock. Since then, he’s been gradually selling down his position by about 1.5 million shares or so per quarter.

This quarter, however, he rapidly intensified his selling, dumping 4.4 million shares at $9.98 each on average. It seems like Spiegel feels that this is good time to be a more aggressive seller of SNAP stock. Now, to be fair, he still has 70 million shares left, so he has plenty of skin in the game. But anytime an executive rapidly steps up their selling, dumping $44 million in stock in a few days, you should take notice.

Spiegel has hardly been the only Snap insider selling off shares. As the stock has rebounded, sellers have appeared from all over the place. Within the past calendar month, Snap’s CFO, Chief Business Officer, General Counsel, Chief Strategy Officer, and a senior VP of Engineering have all been unloading SNAP as well.

Insiders often know best about a business’ outlook. Snap’s insiders seem uniformly convinced that the stock is worth selling here; there hasn’t been a single insider buy over the past year.

User Base Number Was Merely Okay

A big part of the comeback in SNAP stock is based in the idea that Snap’s business has stabilized. Everything starts with ARPU, the number of average users. This figure exploded from 46 million in 2014 to 158 million at the end of 2016 when Snap was preparing its IPO. Notably, right as SNAP stock debuted for the public, its user growth rate plummeted. Insiders are often good at timing, remember.

Snap would reach its peak in Q1 of 2018 with 191 million. This subsequently slipped to 188 million and then 186 million in the following two quarters. In Q4, the user figure again held stable at 186 million. This topped analyst expectations of 184 million. That’s a moral victory, to be sure, but it’s still not a return to user growth.

Bulls had hoped that fixes to the app design would attract new users. Instead, Snap seems merely capable of holding onto its already installed base.

At the end of the day, we still have to ask how big the potential market for Snap is. Snap is hyper-focused on younger users who tend to have less spending power. If Snap never goes mainstream with slightly older users, it will be hard to build a strongly profitable business.

Cut Your Way to Profits?

Since Snap has not been able to keep growing its user base, it has taken up cost cutting to get by. For example, start with its employees. It had 3,069 in 2017. By December of last year, this figure had declined to 2,884 employees.

Snap’s employee firings were reportedly concentrated heavily in its sales department last year. This will likely have a negative effect on revenue growth going forward.

Notably, the company also slashed its R&D spending in 2018. From $1.5 billion in 2017, Snap cut this in half to under $800 million. To have long-term staying power, Snap will need to be able to invest in its business and keep employees happy.

Notably, a recent survey found that 40% of Snap employees regretted their decision to take jobs at the company. This was far higher than the one-in-four dissatisfaction rate across the industry. Ominously for Snap, the tech firm with the most satisfied employees is Facebook (NASDAQ:FB).

Even with the cost-cutting and considerable revenue growth, Snap’s financials remain ugly. Yes, the headline earnings loss looks a lot less bad. Free cash flow, however, came in at -$810 million for full year 2018. This was only marginally better than -$819 million for 2017.

SNAP Stock: Don’t Get Fooled by the Recent Rally

Snap’s recently published annual report summed up the problem with the stock here rather well:

“We began commercial operations in 2011 and for all of our history we have experienced net losses and negative cash flows from operations. As of December 31, 2018, we had an accumulated deficit of $5.9 billion and for the year ended December 31, 2018, we experienced a net loss of $1.3 billion. We expect our operating expenses to increase in the future as we expand our operations. If our revenue does not grow at a greater rate than our expenses, we will not be able to achieve and maintain profitability.”

With a flat user base and the company blowing through hundreds of millions of dollars a year in cash, how can you get excited about SNAP? They are cutting employees in departments such as sales that are vital if the company is going to grow its way to profitability. Its employees are unhappy, and insiders are dumping stock.

It’s not nearly good enough for the business to “stabilize” at this level; things need to get far better for SNAP stock to make sense as an investment.

At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.

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