Here we go again! Maligned social media stock Snap Inc (NYSE:SNAP) is in full rebound mode after a disastrous quarter sent shares tumbling.
Bulls take this as a sign that the worst is over for SNAP stock. All the bad is baked into the price. The risk-reward profile now skews to the upside. But the problem with this bullish take is that SNAP stock has rebounded in similar fashion before, and the rally has never lasted.
SNAP stock dropped big after the May 2017 report from $23 to $18. Then it rebounded to $21 over the next month, only to fall all the way to $14 by the next earnings report.
That report was ugly, and shares dropped from $14 to $12. Then SNAP stock rebounded all the way to $15 by the next earnings report.
But guess what? That report was also ugly. SNAP stock dropped from $15 to $12.
And so here we are again. Snapchat stock has rallied off its post-earnings low back to $15. Is this rally different? Or will the next earnings report yet again be a sharp downward catalyst?
I think the latter. Here’s why.
My feelings on SNAP are fairly straightforward.
Ad revenue growth rates are decelerating at a rapid rate, while ad revenue growth rates at Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) are very stable. That makes some sense (the hyper-growth player should experience slowing growth as the business scales). But the slowdown is happening far too soon. Snap’s ad revenue base is about 2% the size of Facebook’s ad revenue base, but Snap’s growth rate last quarter (62%) was very comparable to Facebook’s growth rate (49%).
The takeaway is pretty simple. Advertisers continue to strongly prefer Facebook and Google over Snapchat due to their greater size and reach.
According to the Wall Street Journal, major advertising agencies plan to boost their ad spending on Amazon by 40% to 100% in 2018. The underlying consensus is that advertisers really want a third player to emerge in the digital advertising space to challenge the Facebook/Google duopoly. Because those two tech giants control such a large portion of the market (more than 70% in the U.S.), they have the leverage in pricing and data-sharing negotiations.
Advertisers don’t like this. Thus, they are rooting for a third player to emerge to add some balance to the digital ad market.
But I highly doubt advertising dollars will come out of Facebook and Google and go towards Amazon in 2018. After all, there is a reason Facebook and Google continue to extend their digital advertising leads, and it’s because they offer the best ad products on the market. Advertisers won’t pull their money from the best.
Instead, advertisers will pull their money from the rest. In 2018, digital ad dollars will gradually come out of smaller digital ad players and go towards Amazon. That means a bad year ahead for small digital ad players.
According to eMarketer, SNAP is one of the smaller players. In fact, it’s one of the smallest players. That doesn’t position the company well ahead of intensifying ad dollar competition from Amazon.
Buyer beware. Don’t let this recent rally fool you. A rebound after a post-earnings sell-off is nothing new for SNAP stock, and its always short-circuited by disappointing quarterly numbers.
I don’t think that trend will change anytime soon. In fact, the trend for SNAP stock could get worse in 2018 with Amazon competition coming.
As of this writing, Luke Lango was long FB, AMZN, and GOOG.