Facebook Inc (NASDAQ:FB) is driving the competition to react to its enhancements. The social networking giant keeps making its properties better. Introduced last year in August, Instagram Stories is lifting user engagement. On May 23, Instagram launched location Stories. By compiling Stories around hashtags and locations, Snap Inc (NYSE:SNAP) must respond by making its own “Our Story” feature better. This will benefit Snapchat users, driving higher user engagement and daily activity on the messaging app.
Stuck in a narrow trading range between $20 and $24, SNAP shares may eventually break out but it needs a few things going its way.
What SNAP Stock Needs
First, it needs a higher proportion of its users rating the app a full five stars. On Google Play, Snapchat is rated five-stars by around 7.18 million out of the nearly 12 million ratings received. Conversely, Instagram has 35.13 million five-star ratings out of the 49.3 million ratings given by its users.
Selling pressure could pick up on its shares if insiders sell the stock between 90 and 180 days after the company’s IPO. Fortunately, some of the investors agreed not to sell the stock for a year. This concerted effort should prevent the stock from falling in the months ahead. It gives the company more time in building its business.
In the first quarter, the company lost $2.31 per share, despite revenue growing nearly three-fold to $149.65 million. The weak results are discouraging for shareholders. In the quarters ahead, Snap must grow its daily active user (“DAU”) base.
SNAP has a good mix of DAUs. 87% of the users in the U.S. are between the ages of 18 to 34. Instead of inviting new users to add all the contacts in their address book to grow the user base, the company does something else. It builds creation tools that Snapchat users will find useful. That, in turn, sustains daily active user growth.
Twitter Inc (NYSE:TWTR) is an example of a company whose DAUs dwindled in the last few years. This led to advertising money shrinking. But in its first quarter, Twitter reported monthly active users growing 6% year-over-year to 328 million.
Snapchat Users Are Engaged
DAU is just one way to measure SNAP’s potential. Users spend, on average, 30 minutes a day on the app. So, as Snapchat introduce better, higher-value features, its users will more likely create a Snap and either add it to their Story or share it with their friends. Though this type of investment will pay off in the long run, investors should expect losses and higher expenses in the short-term.
SNAP’s 20% drop after reporting its first quarter could happen again in future quarters should it issue another loss.
Snap is not a stock for the faint of heart. Short float is a modest 6.7%, but a squeeze could happen if the company’s investments pay off earlier than expected. With a massive market capitalization of $26.9 billion, expectations are high that SNAP stock continues its pace of growth. Still, the app has over 3 billion Snaps on its platform. Such high engagement will attract advertisers along with their big budgets.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
