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Snap, crackle, pop: A case study in chasing a hot stock

Is Snap sustainable?

Short sellers pounced on “camera company” Snap’s (SNAP) newly public shares on Tuesday. And for the parent company of disappearing photo-texting service Snapchat, the results were ugly: Shares fell nearly 10 percent to bring the total peak-to-trough drop from Friday’s ebullient post-IPO high to nearly 30 percent.

In a matter of days, the stock has succumbed to a bear market. And everyone -- especially the millennials who bought heavily into the IPO -- have been provided a lesson in the pitfalls of chasing “growth” investments without an eye to valuation or hard fundamentals.

What's next for Snap Inc. investors?

The result was a predictable for a post-IPO surge in a company that isn’t profitable, has only a single tangible product to justify its self-identification as a camera company and has subjected investors to a number of questionable demands -- including floating only nonvoting Class A shares and asking a quarter of its buyers to agree to not sell for a year (via a lockup agreement).

On March 3, amid a speculative fever over the first major tech IPO in years, Snap’s market cap soared past the $40 billion threshold -- pushing it above the likes of eBay (EBAY) and Sony (SNE) -- up from its IPO valuation of just over $20 billion.

Some cautious analyst statements have weighed on sentiment as well, with Needham analyst Laura Martin writing in a note to clients that Snap is a “lottery-like stock.” Among the risks she noted are the fact that the company’s total addressable market is 80 percent smaller than Facebook’s (FB) and that, in her opinion, it has no clear path to profitability before 2020.

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In fact, in a surprising turnabout for normally bullish Wall Street analysts, as of Monday among analysts covering Snap, five had sell ratings, two had holds and none had a buy, including those from Nomura and Aegis Capital.

At the end of the day, this is what should matter most to conservative investors: According to the company’s S-1 filling, Snap reported revenue of $404.5 million and a loss of $514.6 million in 2016, up from a loss of $372.9 million a year earlier. And while user growth clocked in a 48 percent from a year earlier in the fourth quarter, the rate of increase is slowing.  

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