Despite the fact that the social media boom is coming to an end, Snap Inc. (NYSE:SNAP), the parent company of Snapchat, had a very successful IPO with the shares rising almost 60% from its issue price of $17. Although the retail investors didn’t get to ride the entire rally-as it opened at around $24-the stock is still up considerably.
Although the social media boom is coming to an end, the stocks in the sector are still trading in bubble territory. The likes of Snap, Twitter, and even Facebook to an extent, are trading at valuations they will struggle to justify in the years to come. You can make a case for Facebook’s valuation given its digital marketing market share, profitability, and remarkable growth. However, as for Snap, I don’t see how the company can justify its current valuation.
It seems like Snap’s owners have exploited a market that is hungry for a fresh high-profile IPO by cashing out almost $1 billion in shares. At current levels, Snap is clearly overvalued, and the slowdown in Snapchat’s user growth rate will make it further difficult for the company to grow into its valuation. However, as mentioned above, Snap can continue trading at irrational on account of its strong revenue growth and path to profitability.
The company’s ability to justify its current price, or move higher, largely depends on its ability to monetize its core user base. Thus, I think investors should keep close tabs on the company’s monetization efforts and make their decision accordingly. However, as of now, I think investors should watch the stock from the sidelines and wait for a significant irrational move, in either direction, before taking a long or short position.