In a previous article, I stated that the honeymoon for Snap Inc (NYSE:SNAP) was over. However, the question of whether or not SNAP stock is a good buy remains, despite the negative reviews from me and others.
The stock trades at a modestly higher level since I made that call, after losing about 20% of its value and recovering. Analyst upgrades and a change of strategy have renewed interest in the social media stock. Unfortunately for investors of SNAP stock, innovations in its platform are unlikely to improve Snap’s chances of competing with the large entities in the social media space.
SNAP Stock Receives Mixed Reviews on Wall Street
Analysts have a mixed view on SNAP. On Dec. 5, Barclay’s upgraded the stock and set its price target at $18 per share. Conversely, on Dec. 6, Evercore initiated coverage on the stock with an “underperform” rating and a price target of $7 per share.
Barclay’s is winning the battle for now, as SNAP stock has risen about 10% since its upgrade. Additionally, Tencent Holdings Ltd (OTCMKTS:TCEHY), a China-based investment holding company, bought 12% of SNAP stock in early November near the bottom of the stock’s recent 20% decline.
SNAP has also taken the lead in key areas. Bitmoji and Snapchat, both Snap Inc. products, were the two most downloaded apps in the U.S. in 2017. The company also released Lens Studio this month, an augmented reality (AR) app that allows the objects inside Snapchat to be used on Mac and Windows desktop computers. Bringing the app to PCs will allow for more design features not possible on smartphones.
SNAP Stock Still Struggles With Competition and Profitability
Although Lens Studio could keep more users on the Snapchat platform, SNAP’s core competitive issues remain a concern. The copying of Snapchat’s key features by Facebook Inc (NASDAQ:FB) and other platforms prevented Snapchat from moving far beyond its core teen user base. The same can be said of Twitter Inc (NASDAQ:TWTR), which faces different sets of challenges against the tech giants. Additionally, Snap lost out to Apple Inc. (NASDAQ:AAPL) in its attempt to purchase Shazam, an app specializing in the recognition of music and images.
Financials remain a concern as well. The good news is Snapchat stock will likely increase its revenues by about 75% in the next fiscal year. Despite higher revenue, earning a profit remains elusive, however. Currently, not a single analyst predicts profitability until the next decade (if the stock survives that long). Moreover, the current stock price places the market cap at over $19 billion, and the price-to-sales (PS) ratio near an astounding 27! And with SNAP stock trading at over $16 per share, it only has to climb about 10% to reach the Barclay’s price target.
To be sure, stocks can surge by several multiples despite high ratios and negative earnings. However, most of the time, high-valuation stocks are industry leaders. SNAP stock has lost out to Facebook and Apple in most of its attempts to gain a competitive advantage. Unlike Square Inc (NYSE:SQ), SNAP has not yet found a niche that can defy the financial and competitive influence of the tech giants.
Final Thoughts on SNAP Stock
Despite Lens Studio and the popularity of its apps, competitive concerns remain with SNAP stock.
Unfortunately for the company, it’s consistently been copied or outcompeted in all of its previous successful endeavors. If Lens Studio carves out a niche that Facebook can’t copy, Snapchat stock will grow substantially in value. However, if history serves as a guide, there’s nothing that Snap can possess that Facebook cannot take away.
There’s also the possibility that one of the large social media companies could buy out SNAP. In that case, the stock would turn a profit. However, unless investors are willing to gamble on a buyout, they’re likely best off avoiding SNAP stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
