If you’ve followed my work recently, you’ll notice that I don’t like Snap Inc (NYSE:SNAP). I say this as my biggest disclosure for this story. I don’t own shares of Facebook Inc (NASDAQ:FB) or Twitter Inc (NYSE:TWTR), either.
Generally, social media is an interesting sector, but I’m not convinced enough to put serious money at risk. But if I had to pick a name from this industry, I’d certainly avoid SNAP stock.
Let’s get the low-hanging fruit out of the way. The only kind of momentum that SNAP stock is experiencing is the negative variety. Since closing at $24.48 on its public debut, SNAP shed nearly 45% in market value. To its credit, company shares trended sideways for a few months. But by the time June rolled around, early investors have experienced nothing but severe volatility.
As InvestorPlace contributors Luke Lango and Laura Hoy noted, lockup expirations pose a serious threat to stability. With so much drama impacting the firm — not to mention the ugliness in the markets — early birds are surely anxious to jump ship. Aug. 14 is the date to watch, as some bigwigs and assorted insiders will control 782 million shares.
July 29 was the first of the nearer-term lockup expirations, and within days, SNAP stock fell lower. But with more shares at risk on August 14, I can’t imagine too many people wanting to take a shot.
Hoy explained that typically, important insiders won’t dump their shares so quickly after an initial public offering. However, Snapchat is suffering from a revolving door of executives. Exacerbating matters is the fact that the company is confused as to its long-term strategy.
If I didn’t know any better, I’d say Snapchat is begging its associates to drop out.
Snapchat Is Demographic Hell
Of the many problems impacting SNAP stock, one of the most egregious is Facebook. Specifically, Mark Zuckerberg and company are stealing Snap’s best ideas, and running with it. For example, Instagram Stories has 200 million users. Lango writes, “So, in about 8 months, Facebook had created a Snapchat clone that was already more popular and more widely used than SNAP itself.”
An underappreciated reason why Facebook was so successful in ripping off Snapchat is demographics. It doesn’t take a genius to figure out that Snap appeals to millennials. While that’s obviously a desirable demo in some respects, from other angles, it’s a liability. By skewing so firmly to youth, Snap alienates the older demographic.
I think that’s incredibly myopic for a social media company. Although Facebook also caters to the young, it genuinely branches out to every demo possible. Thus, it’s not unusual for your parents to be on Facebook. The platform provides an excellent way to keep track of your colleagues. It is unusual, however, for your parents to be on Snapchat.
In business, you want to cast as wide a net as possible. Snap is largely successful hooking in college-age people, and those just outside that age bracket. Facebook, again, appeals to a much broader base through the spirit of inclusivity.
Therefore, Facebook gets away with copying and being a better Snapchat than Snapchat.
SNAP Stock Has No Room to Run
Facebook’s biggest demo are men and women aged 25 to 34.
Most impressively, we see comparatively tight integration up to women aged 45 to 54. The biggest demographic drop-off is in women aged 55 to 64.
Contrast this picture with Snap. We see a sharp differential between the 18 to 24 age group, and the 25 to 34 category.
However, by the time we come to Snapchat users aged 35 and older, the demo volume falls off a cliff.
I don’t need to remind anybody that the 18 to 24 demo is hardly what you would call financially secure. Why then would any advertiser want to risk capital on a weak market? Although advertising on Facebook is considerably more expensive, the returns are better. You’re hitting more people who have money, and are willing to spend it.
Given this dilemma, SNAP stock doesn’t have much room to run. It appears to have chosen “trendy” over profitability. That might be useful in generating hype. But once the noise dies down, true investors will want to understand the fundamentals. I’m not sure how you convince potential Snap buyers to overlook corporate deficiencies.
The only real positive here is that fortunately, Snap Inc is a camera company.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.