Social media newbie Snap Inc. (NYSE:SNAP) has lost nearly half of its value since going public at the beginning of March. High expectations and tons of hype helped the stock soar to $27 per share when SNAP made its debut on wall street, but since then investor confidence has been crumbling and the share price has dropped as many began to argue that the stock is overvalued.
I’m in the camp of traders who believe that with a $17.4 billion market cap, Snap Inc stock is overvalued. I’m also in the even more bearish group, which believes Snapchat’s future looks muddy despite the fact that the firm’s revenue and user base has been growing.
I think it’s a matter of time before those figures start to reflect the stiff competition in the social media space and the challenges associated with trying to monetize users.
The Hot Dog Effect
Earlier this year SNAP got some major kudos for its dancing hot dog feature which users loved. Now, the firm has opened up the augmented reality lenses to big brands in an effort to boost its advertising clout. So far, Time Warner Inc. (NYSE:TWX) and Anheuser Busch Inbev (NYSE:BUD) have signed on to create their own virtual reality filters that Snapchat says can be rolled out across the entire user base or to targeted audiences.
The news of the new “World Lenses” helped SNAP stock rise more than 6% last week as investors cheered the firm’s latest advertising advances. I don’t disagree that allowing brands to jump on board a wildly popular trend is a great move for SNAP, but I don’t think it solves some the firm’s largest problems.
Advertising Know How
The dancing hot dog was a phenomenon that SNAP users sent viral, but will the same be true for whatever TWX and BUD have dreamed up?
How the lenses work will be imperative in determining whether or not they are as successful as the hot dog was. The novelty of a dancing object is likely to wear off eventually, so the new lenses will have to build on that concept in an engaging way.
Competition
Then there’s the fact that Facebook Inc.’s (NASDAQ:FB) Instagram is likely to replicate the World Lenses. So far, Instagram has been able to successfully copy most of Snapchat’s features.
For that reason, it’s not a stretch to believe that we will see a similar feature popping up on Instagram in the future. Not only does Facebook have the cash and manpower behind it to keep up with Snapchat’s advances, but the firm has a lot more experience working with advertisers to monetize its users.
Harder Comparisons
Hot dogs aside, the near-term for SNAP looks shaky because the firm’s financials are already on thin ice. In the third quarter of 2017, year over year comparisons are likely to get much more difficult for the firm because at the same time in 2016, Snap started to focus on revenue generation in preparation for its IPO. In June last year SNAP began to sell advertising space on the platform to third parties.
If Snapchat is able to meet analysts expectations, the firm will grow its year-over-year revenue by 90% in the third and fourth quarters. However, SNAP has been known to underachieve, missing analysts’ expectations in two out of two quarters since it went public. If the firm’s results in the third quarter follow the same trend, stalling year-over-year growth will likely raise red flags.
Trusting Management
When it comes to SNAP co-founder and CEO Evan Spiegel, you either love him or hate him. I fall in the latter category because I think his lack of transparency and focus bodes poorly for Snapchat’s future. First, there’s the fact that Spiegel chose to label the firm as a “camera company” in reference to Snapchat’s photo-enabled glasses.
Is SNAP going to become a hardware company? I hope not, because it’s a difficult space to operate in, especially when you’re talking about cameras.
There also have been reports that SNAP is making bets in the drone space as well. This on its own isn’t a bad thing, but let’s face it, Snap finances don’t really leave a lot of wiggle room for other bets. This is especially true when you consider that SNAP is still working on getting its bread and butter- advertising- into a profitable place.
The Bottom Line on SNAP Stock
It’s difficult to get behind SNAP stock because the company has no real moat to protect it from competitors. Not only have we seen SNAP miss expectations consistently since it went public, but we’re likely to see yearly comparisons get a lot tougher to improve upon.
Perhaps even more concerning is the fact that the company’s CEO is out there living his life as if the problems at SNAP aren’t real. Before I’d be willing to consider SNAP, its valuation would have to come down significantly, and management would come forward with a concrete plan that will help Snapchat cope with competitive pressure.
As of this writing, Laura Hoy was long FB.
