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Snap Inc (SNAP) Stock Is Disappearing Along With Its Users

Snapchat is feeling the pressure from Facebook’s Instagram

Source: Shutterstock

     

According to a report from Bloomberg, Snap Inc (NYSE:SNAP) is this year’s most shorted tech initial public offering. About 28% of the float is in short positions.

Snap Inc (SNAP) Stock Is Disappearing Along With Its Users
Source: Shutterstock

It’s true that short sellers can get things very wrong. And there is always the potential for a short squeeze. This is when short sellers are forced to buy back stock to cover their positions.

But regarding SNAP stock, there are serious fundamental issues to keep in mind. Investors got a sense of this during the company’s first quarterly report as a public company. Even though revenues soared, there was lackluster growth in the user base. Consider that the quarter-over-quarter increase was a mere 5%.

On the earnings call, Snap Inc CEO Evan Spiegel tried to spin things, saying:

“So, ultimately, I think the way that we try to help people understand how we think about daily active user growth is really through the lens of creativity and creation, because we built our entire business on creation.”

He then focused on some of the progress with the Android app, which is based on Alphabet Inc’s (NASDAQ:GOOGL,NASDAQ:GOOG) platform. Wall Street wasn’t buying it. On the news of the earnings, SNAP stock lost a grueling 18%.

The problem, is that evidence concerning fading user growth is piling up. According to a recent report from Sensor Tower, the global app downloads for Snapchat fell by 22% on a year-over-year basis and by 40% on Apple Inc.’s (NASDAQ:AAPL) iOS.

Taking this all into account, Nomura analyst Anthony DiClemente lowered his revenue estimates. His rating on SNAP stock is “reduce” and the price target is at $14.

Even one of SNAP’s underwriters, JPMorgan Chase, has become more negative. Recently the firm’s analysts put out a report that indicated that the user growth will continue its deceleration. For the current quarter, they revised downward the number of user gains from 10 million to 8 million.

Considering this, JPM also reduced the price target on SNAP stock from $20 to $18. The problem? Well, I think there are two major challenges:

Competition: It looks like Facebook Inc’s (NASDAQ:FB) aggressive moves are having a punishing impact. At the heart of this has been adopting Snapchat features on the Instagram platform. During the past year, the app’s Stories feature has attracted over 200 million users, while Snap has 166 million DAUs (Daily Active Users).

Hey, Microsoft Corporation (NASDAQ:MSFT) has jumped into the fray as well. The company has added its own version of Stories to Skype.

Yet perhaps the biggest wildcard is AAPL. During the WWDC event, the company announced new AR (Augmented Reality) features for its iMessage system – such as looping and bouncing photos. But this may just be a taste of what may come from AAPL. After all, there are still few details about the upcoming iPhone 8, which is expected to hit the markets during the fall.

Brand: The Snapchat app is still very much about younger generations — and this putting a cap on growth. For the most part, the company has not been able to do what FB did at this stage of its development — that is, to go mainstream.

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