Speculative Fervor Favors Snap Inc Stock Now… but Not Tomorrow

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InvestorPlace readers who follow my work likely know that I’m not the biggest fan of Snap Inc (NYSE:SNAP). While its Snapchat app is resoundingly popular with the younger Gen-Y and Gen-Z demographic, Snap stock is a different animal. Year-to-date, the Snap Inc stock price has fallen nearly 38%. A litany of woes encumber the company and it’s unlikely that shares will recover.

Speculative Fervor Favors Snap Inc (SNAP) Stock Now... but Not Tomorrow
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Almost right out of the gate, Snapchat stock became a sinking ship. Its first two days enjoyed much fanfare and a dramatic leap in market value. But on the third session, Snap stock lost almost 16% of its equity value, closing down at $23.77. Only once did shares close past that level, on March 27. Other than that outlier, it’s been an ugly ride for the youth-centric social media company.

But over the last few months, the Snap Inc stock price belies its poor fundamentals. Since bottoming out at a closing-low of $11.83 on Aug. 11, shares have jumped 29%. This is true despite the fact that Snap is down 8% since Oct. 12.

Of course, the recent Credit Suisse upgrade drove significant enthusiasm in Snap stock. The upgrade’s main thesis is that subscriber growth will be better than expected in the upcoming third quarter SNAP earnings report. Therefore, both revenues and earnings may achieve surprisingly positive results.

In its short lifespan, Snapchat stock has attracted multiple contrarian arguments. But will Credit Suisse get this one right? On the other side of the fence, BTIG analysts retracted their bullish call. They also followed the retraction with a Wall Street rarity: a sincere apology.

But with so many dichotomous opinions flouting around about the Snap Inc stock price, which one offers the best argument?

Snap Stock Has a Value Problem

As someone who has bashed Snap stock at nearly every opportunity, most readers would expect me to continue the trend. Indeed, I am long-term bearish. The positive outlook that one analyst has towards the upcoming SNAP earnings does little to dissuade me from my pessimism.

I’ll address the low-hanging fruit first: one analyst’s opinion doesn’t change the broad consensus. Whether you look at the Snapchat stock news stream at InvestorPlace, or recent analyst opinions, the trend is clear: most folks view SNAP rather dimly. It’s a brave soul that goes against this tough of a grain.

More critically, I fail to see the company’s future value proposition. In order for subscriber growth to mean anything positive for Snapchat stock, management must succeed in converting subs to paying subs. The Q3 SNAP earnings report might just reveal higher-than-expected subscribers, but it doesn’t mean anything if they’re leaching onto a free service.

You might refer to it as the Pandora Media Inc (NYSE:P) problem. As our own Richard Saintvilus states, Pandora has 76.7 million active listeners, but “the service makes no money.” Sirius XM Holdings Inc. (NASDAQ:SIRI), on the other hand, has fewer subscribers (32 million), but they pay for the privilege. As I recently argued, the ability to make people open their wallets is the Midas touch in today’s “freebie” world.

The problem for Snapchat stock is twofold. First, because of the app’s young demographic, revenue-generating conversions are extremely difficult. Our feature writer James Brumley made this point abundantly clear: it’s the parents that are buying stuff for their Gen-Z kids. In the rare instances when teenagers are buying with their own money, they’ll spend everywhere else except in an upgraded, free service.

Second, Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR) dominate the free-user space.

Respect the Speculation Over Snapchat Stock

With all these headwinds, the smart money avoids Snap stock. However, I’m a big believer in technical momentum. If the markets want something, they want something, and it’s usually best not to get in their way. We have our logic, but the markets have their own. Ultimately, they’re always right.

Therefore, I will not completely dismiss the upside potential in the Snap Inc stock price. If the Q3 SNAP earnings report indeed reveals higher than expected sub growth, you’re looking at a major gap-up move. On the technical front, logic doesn’t dictate price; rather, human emotions determine the trajectory.

Just like Snapchat’s immense popularity within youth culture, I’m not going to pretend to understand it. Along the same line, I’m not going to pretend I understand the current rally in Snap stock — yet it’s occurring. And that fact alone means many people are buying into the recovery story. Don’t get caught off-guard should shares continue to rise.

However, once the speculation fades, the fundamentals win out. At that point, no compelling reason exists to buy Snapchat stock over Facebook or even Twitter.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/speculative-fervor-favors-snap-stock-now-not-tomorrow/.

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