Snap Inc (NYSE:SNAP) has pulled off a nice rally over the last 10 or so weeks, with the shares gaining about 12% since an Aug. 11 low. But this may prove to be short-lived. It’s important to keep in mind that there are many headwinds that are likely to weigh on SNAP stock.
Just look at the company’s Spectacles, which are fashionable glasses that allow users to create short videos. When the product debuted about a year ago, there was lots of positive buzz. If anything, it probably helped to bolster the IPO.
But unfortunately for SNAP stock, it appears that Spectacles could be mostly a flash in the pan. According to a report in The Information, there are hundreds of thousands of pairs in Chinese warehouses! And something else: SNAP CEO Evan Spiegel recently claimed that sales have reached about 150,000.
Now it’s true that the hardware business can be extremely tough. Note just that some of the operators — like GoPro Inc (NASDAQ:GPRO), Fitbit Inc (NYSE:FIT) and even the once-ubiquitous BlackBerry Ltd (NYSE:BB) — have faced difficulties in creating products that gin up demand. Even worse, when a product fails, the impact can be terrible on the bottom line because of the need to liquidate inventory.
As for Snapchat stock, the impact is not easy to gauge. For the most part, the company has been vague about the business. Although, it is important to note that management has claimed that Spectacles will likely be a critical part of the growth story. After all, SNAP calls itself a “camera” company, which certainly connotes a hardware focus.
Interestingly enough, Spiegel is already toning down the expectations. At the recent Vanity Fair Establishment Summit, he noted: “Our view is that hardware is going to be an important vehicle for delivering our customer experience maybe in a decade.”
SNAP Stock And The Ad Business
In the meantime, the lion’s share of monetization for SNAP will come from the ad business, which is also proving to be difficult. Part of the reason is that the ad systems are being retooled to allow for more self-service functions. This will likely mean lower revenues — at least in the near-term.
But the biggest issue for the SNAP stock price has to do with absence of significant user growth. During the latest quarter, the growth rate was a dismal 4% on a sequential basis.
Then again, SNAP has an fierce competitor: Facebook Inc (NASDAQ:FB), which for the past year,has leveraged its Instagram platform to fight back. For example, the app’s Stories function added a whopping 100 million daily active users (DAUs) in the first half of this year, which compares to SNAP’s 15 million.
So what does Spiegel say he will do to deal with this? Unfortunately, he’s not saying much. If anything, it seems as if Spiegel does not even consider FB much of a threat.
Bottom Line on SNAP Stock
Research firm eMarketer recently trimmed its forecast for SNAP’s ad revenues for the U.S. market by almost 17% — from $770 million to $642.5 million. By comparison, Instagram is expected to generate over $3 billion.
This is how eMarketer summed things up: “Despite all of its improvements in ad products and measurement, Snapchat remains in the experimental bucket for many marketers. They give it high marks for its creative possibilities and its ability to attract a youth audience, but many have yet to make it a must-buy.”
But this should be no surprise. The two prior SNAP earnings reports have been disappointments. And yes, the next one — due Nov. 7 — will probably not be much better, as Facebook continues to take a toll. In other words, it’s probably best for investors to stay away from SNAP stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
