(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Snap Inc. (SNAP) shares could be worth far less than half of its current valuation when compared to Facebook, Inc. (FB), or about $8 billion, and the market may be coming to this realization. Snap's value is roughly $18 billion today. Adding fuel to the fire, lead underwriter Morgan Stanley analyst Brian Nowak downgraded Snap, the parent of Snapchat, to Equal Weight from Overweight and cut the price target to $16 from $28. Throw in a little bit of uncertainty and bad optics surrounding the pending lock-up expiration we discussed in the past, and the shares of the stock are now in unchartered territory. (For more, see: Snap: The Stock Faces More Downward Pressure.)

SNAP Chart

SNAP data by YCharts

But things could still get much worse for SNAP as we should not forget analysts have the company losing money into 2019. According to YCharts, current analyst estimates are for the enterprise to have a loss of $0.12 in 2019 with revenue growing to $3.16 billion. With a market cap of roughly $18 billion, the stock trades at nearly six times 2019 revenue estimates, not cheap for a company with no sign of profitably in sight. (For more, see also: Snap: Morgan Stanley CEO Downgrades After March IPO.)

SNAP Annual EPS Estimates Chart

SNAP Annual EPS Estimates data by YCharts

When we look at SNAP through the lens of Facebook, we can walk away with an even direr impression. In its 10-Q, Facebook reported first quarter of 2017 revenue at $8.032 billion and 1.284 billion daily active users (DAU), equating to about $6.26 per user. In Snap's 10-Q the company reported revenue was $149.648 million, while it had 166 million DAU or $0.90 per user. To make matters worse, its global DAU grew by roughly 5% sequentially, while Facebook global DAU's grew by 5% sequentially too. SNAP does not offer more attractive DAU growth, which could potentially drive revenue higher. But Facebook, which is multiple times larger, is growing users at the same rate and at a much higher monetization rate.

Facebook has a market cap of roughly $460 billion, which means the market currently values each of Facebook's DAU at $358, while Snap's market cap is $18 billion, and is valued at $108 per DAU. Facebook trades at only 3.3 times that of Snap's user base on a market cap basis, while Facebook earns nearly 7 times more dollars per user on a revenue basis. It tells us two things: Facebook is grossly undervalued when compared to Snap, or Snap is grossly overvalued when compared to Facebook.

How do we decide which way is the correct way to evaluate this company? That is simple: Facebook is the proven player, Snap is the newcomer. Facebook should not be compared to Snap, but it should be Snap that is compared to Facebook. That being the case and we adjust the ratio to what Facebook and SNAP monetize per user, we get a value of $51.63 per daily active user. This equates to value for Snap around the $8.6 billion area, less than half its current valuation.

To be sure, Snap's share price and value could make sustained gains if the company narrows losses faster than expected or if it tops estimates in other metrics. This could turn Snap's post-IPO narrative into a much more positive direction. But there's no indication, at least right now, that these improvements will happen on a consistent basis anytime soon—including in the coming quarterly earnings results. That means the pressure on Snap's shares may still be downward.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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