The investor love is gone. The Snap Inc (NYSE:SNAP) honeymoon is over. And as the company gets set to release its third earnings report, it faces mounting losses and doubts about its ability to adequately monetize Snapchat. Since its March 2 initial public offering, SNAP stock has mostly gone in one direction.
Unfortunately for long investors in SNAP stock, there’s little that can stop the decline.
When the company changed its name from Snapchat, its primary platform, to Snap Inc., in September 2016, management sought to diversify its image away from Snapchat to accommodate its Spectacles, Bitmoji, and Zenly platforms. More than a year later, though, Snapchat remains the focus.
It’s easy to see why SNAP stock gained as much as it did following the IPO. Analysts projected revenues to double in 2017 from 2016 levels on stronger advertising sales. Additionally, the company reported 173 million people were using the Snapchat platform as of the second quarter 2017, up from the prior year’s 143 million.
Then came reports of losses and negative cash flow, and investors soured on SNAP stock. The shares trade at 9% below their $17 IPO price. And for those investors, the negatives of SNAP outweigh any positive aspects of this company.
Growth Remains Uncertain
SNAP earnings are due out on Nov. 7. The consensus earnings per share (EPS) forecast is for a loss of 31 cents. The company missed estimates by 2 cents for its June earnings after a beat in March. Candidly, there’s not enough history to build a track record. Still, the main problem remains the lack of a path to profitability. Analysts predict losses through 2020.
It’s true that sometimes technology stocks rise to high levels despite EPS losses. The challenge for SNAP stock is its competition.
Snap has a user base consisting primarily of teenagers and young adults, a group with limited spending power absent the help of their parents. Its lack of appeal outside of Generation Z also limits the platform’s potential for selling ads. Without a broad appeal, competing with Facebook Inc (NASDAQ:FB) or even Twitter Inc (NASDAQ:TWTR) for ad dollars presents a challenge.
Facebook’s Copies Are Better
Worse, there’s no apparent path to getting ahead that Facebook can’t later co-opt. Snapchat invented a feature called Stories that runs a photo or video for 24 hours before disappearing. Facebook responded by creating its version of the same feature, only better. Spectacles, virtual reality (VR) glasses for Snapchat, are also being copied on Facebook’s own VR platform.
The company should have learned from Alphabet Inc (NASDAQ:GOOGL). Back when the company was just called Google, its Google Plus allowed users to post to certain groups of friends. Facebook followed with similar, better functionality. Six years later, despite having most of Facebook’s features, Google Plus remains as a largely unused platform.The same could happen if fickle teenagers decide to stop using Snapchat. I’m not sure if SNAP doesn’t see their competitive disadvantage, or simply choosing to ignore it. Regardless, it has hurt investors.
Limit SNAP Stock Exposure
In early 2016, Alphabet offered to buy Snapchat for $30 billion. SNAP stock opens this morning with a $18.5 billion market capitalization.
Despite its unique social media features, Snap lacks a vision that will sustain both user and investor interest. That it can’t grow a large following outside of the young limits its growth. When the children tire of Snapchat as a toy, they’ll move on… most likely to Facebook. That’s what SNAP stock investors are already doing.
Given the alternative investments in social media platforms, investors should limit their Snapchat exposure to playing with picture filters.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
