Snap Inc (NYSE:SNAP) redesigned its popular app. And the hope is that it will be enough to gin up more user growth and engagement. But for investors in SNAP stock, I think there should be skepticism. The redesign of an app is always perilous, change can be difficult even if it is the right path.
Hey, just look at how many changes Twitter Inc (NYSE:TWTR) has made over the years. Yet the moves haven’t done much to rev up the growth. So what has SNAP done with its own changes? Well, here’s a run-down:
While these challenges are likely to help and could perhaps lead to more monetization, they are probably not enough to deal with some of the major issues with SNAP stock. Perhaps the biggest problem is Facebook Inc’s (NASDAQ:FB) Instagram “Stories.”
This feature been a wild success, with the user count hitting 300 million daily, up from 250 million from June. Snap, by comparison, has 173 million. Keep in mind that Instagram “Stories” was launched in August 2016.
It’s true that the app has been mostly a knock-off of Snapchat. But then again, FB has the advantage of enormous scale and analytics. It also helps that the overall Instagram app consolidates other features, allowing for a better user experience.
In light of all this, SNAP stock has continued to deteriorate. The fact is that CEO Evan Spiegel has not been proactive in dealing with the threat. And unfortunately, the company has seen a rapid deceleration in the user growth. Keep in mind that during the latest quarter there was a mere 2.9% increase.
The consumer app world can go cold very fast, and this appears to be the case with Snapchat. What’s more, it can be extremely tough to regain momentum.Something else: SNAP has the risk of having only one app. So if the problems continue, the the downside could be significant.
It is also not encouraging that the company has had troubles getting users to look at new offerings, such as Spectacles (these are the sunglasses with a built-in camera). During the latest quarter, the company had to take a $40 million charge-off because of unsold devices.
While SNAP stock is far from its highs, the valuation still remains at nose-bleed levels. Consider that the shares trade a whopping 25 times sales. By comparison, FB is at 15X and Alphabet Inc (NASDAQ:GOOGL) sports a 7X multiple.
Even worse for the stock valuation, the company continues to hemorrhage significant losses. In fact, it looks like profitability is years away. And the revenue growth is slowing down, which is certainly a big-time warning sign.
For example, Research firm eMarketer recently trimmed its ad forecasts for the U.S. market this year by 17% from $770 million to $642.5 million. To put things into perspective, Instagram is expected to generate over $3 billion.
For the most part, the redesign is really not enough right now to justify a bull case on SNAP stock, especially in light of the massive valuation and the intense competitive threat of Instagram.
Tom Taulli is 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.