Snap Inc (NYSE:SNAP) was the recent recipient of a bullish bid for once, rising on the back of a report saying that Facebook Inc’s (NASDAQ:FB) flagship site is losing touch with teens and young adults. The news sent SNAP stock dramatically higher on hopes that advertisers will migrate to Snapchat and help the company eventually will migrate into the black.
But with Snap’s shares up some 20% from its August lows, it’s fair to ask: Is Wall Street’s celebration a little long in the tooth?
Here’s why I believe that’s an affirmative.
Growth Projections
The eMarketer research definitely casts Snap in a more positive light, and Facebook in a more negative one. The research firm said in a release:
“eMarketer has reduced its usage estimates for US monthly Facebook users ages 12 to 17 and 18 to 24. Yet for the same age groups, we have kept unchanged or adjusted higher our usage estimates for Snapchat and Instagram, suggesting younger social network users are turning away from Facebook in favor of other platforms.”
Note that Facebook’s Instagram is also taking users from Facebook. In fact, whereas Snapchat is seen addressing 47% of U.S. social media users in 2021, 55.4% of users will use Instagram. Not to mention, over the past few quarters we’ve seen evidence that Instagram is cutting into Snapchat’s user growth, in large part because the former is adopting many of the latter’s best features.
So although the decline isn’t great news for Facebook, it’s also not quite as bad as it looks.
Where it gets good for SNAP stock is in the younger user numbers. In the 12-24 age group, Snapchat is seen as the most popular social media site. That’s a big deal for marketers, as that demographic is arguably the hardest to reach now that young people are abandoning traditional cable and radio.
However, while eMarketer’s predictions about the future of social media are a good starting point for examining SNAP’s future, they’re not the end-all be-all for the social media site. Over the next four years, we very well could see a shift in the way young people view social media.
Plus, some analysts worry SNAP might lose some of its allure once it becomes a more mainstream platform.
New Media
Another thing propelling the rally in SNAP stock is the success of the company’s original content initiatives. Stay Tuned, a news show created by NBC, reportedly drew in 29 million unique viewers. SNAP management also said a reality dating show, Phone Swap, drew 10 million unique videos per episode.
Those are stellar figures, but I see two problems with the report.
First, as Business Insider pointed out, the data is coming from unnamed sources, Snapchat and its partners. None of the metrics have been verified, which doesn’t mean the numbers aren’t correct, but it does leave the door open for mistakes to be made and figures to be inflated. During its initial public offering, a former SNAP employee alleged that the company falsified some of its growth metrics … so it’s worth keeping in mind that viewer numbers might not be quite as rosy as they’re made out to be.
The second issue with taking those figures at face value is that you can’t be entirely sure of what they mean. While 10 million unique viewers is an impressive stat for a new show, we don’t know how long those viewers were sticking around. Someone who tunes in for just a few seconds isn’t going to be very valuable to an advertiser, so until those numbers are quantified in a way that takes into account the viewers that dropped off, they’re not telling the whole story.
A Long Road Ahead
Snap is still unprofitable, and soundly so. While the company doesn’t have any debt, it’s already burning cash paying for expenses to make its platform unique and draw in new users.
There’s also some question as to whether Snapchat has the potential to expand into major markets like China.
Snapchat relies on Alphabet Inc’s (NASDAQ:GOOGL) Google Cloud to operate, and Google has been banned in China. Facebook is experiencing a similar issue, with its site also blocked and recent reports that Facebook-owned WhatsApp was experiencing problems over the past month. However, SNAP is dependent on Alphabet, meaning negotiating its way into China will be much harder than it will for Facebook, which can negotiate entirely on behalf of itself.
A migration to another provider might do the trick, but it’s locked into a contract through 2021 … for $400 million a year.
So while Snap has opened an office in China, it’s hard to see the company progressing much further than that.
Bottom Line on SNAP Stock
I don’t think Snap’s rally is unfounded, but there aren’t enough drivers — and still enough lingering doubts — to keep the momentum going. Yes, Snapchat is increasingly popular among younger users, but many investors already suspected that; eMarketer’s data merely confirmed it.
And it’s a long way between there and actually monetizing those users. Not to mention, its geographic growth prospects exclude the world’s largest internet population.
While SNAP stock has found its way off the bottom for now, the focus is likely to shift to the company’s next earnings report. Without meaningful improvements in the fundamentals, this rally is destined to fizzle.
As of this writing, Laura Hoy was long FB.
