Lately the gains on Snap Inc (NYSE:SNAP) have been disappearing. Last week, SNAP stock lost about 7.4% to $20.56. It’s important to keep in mind that most IPOs involve lots of volatility. For the most part, the markets must go through a process of adjusting and learning about the company. But SNAP has also not released much information either.
Consequently, the void has been filled with mostly negative news.
There are, of course, various analyst reports that generally focus on the nose-bleed valuation. But there are also concerns about the deceleration in the user base as well as the traction with monetization.
More Trouble for Snapchat?
In fact, some of the analyst reports on SNAP stock have been downright frightening. Just look at Pivotal Research Group’s Brian Wieser, who issued a $10 price target. In his analysis, he noted: SNAP stock is “significantly overvalued given the likely scale of its long-term opportunity and the risks associated with executing against that opportunity.”
Snapchat has also had to deal with some internal drama: former employee, Anthony Pompliano (he was on the payroll for only one month) alleges that SNAP stock has an “outsized valuation [that] is built on a house of cards” and that management has engaged in manipulation of metrics.
But perhaps the biggest issue for Snapchat has been the company’s arch rival, Facebook Inc (NASDAQ:FB). Let’s face it, the fight between these players seems almost unfair. FB is growing revenues at more than 50% and it is generating substantial cash flows. But the most powerful weapon is its massive user base, which spans marque assets like Instagram (600 million users), Messenger (1 billion users) and WhatsApp (1.2 billion users).
Of course, FB has been cleverly leveraging all these with essentially knock-off features of Snapchat. The joke is that SNAP is really just the main R&D subsidiary of FB!
So yes, investors in SNAP stock should have some worries. Tech history has plenty of notable examples of heavyweights crushing upstarts. Look back at the 1990s, when Microsoft Corporation (NASDAQ:MSFT) relentlessly attacked Netscape.
Bottom Line on SNAP Stock
Yet even if FB is successful, it will likely take several years to make a real impact. The good news for SNAP stock is that the company has some rock-solid advantages.
After all, FB cannot copy the company’s strong brand, which has attracted millions of users in the coveted 12-to-24-year-old demographic. And the engagement is off-the-charts, with 158 million active users using the app 18 times a day for 30 minutes. Consider that the word “Snapchat” has become a verb in the world’s lexicon.
Besides, the attacks from FB are certainly a lightning rod for morale across the organization for SNAP. What’s more, the battle highlights the company as a top contender in the industry. What better validation for Snapchat than to be on the hit list of FB? If anything, this gets the attention of more users as well as advertisers. Hey, who’s copying the features of companies like AOL, Yahoo! Inc. (NASDAQ:YHOO) or even Twitter Inc (NYSE:TWTR).
It’s true that SNAP stock is trading at a crazy valuation (it’s at about 50 times revenues). But this is fairly normal for early-stage companies as it takes time for the revenues to catch up with the valuation.
However, Snapchat is essentially a rare commodity — a top brand in a cutting-edge market. In other words, if the company keeps innovating and growing at a rapid clip, it seems like a good bet that SNAP stock should also rack-up the gains as well.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.