Snap Inc Stock Slump After Announcing Its Earnings Won’t Last

Snap stock - Snap Inc Stock Slump After Announcing Its Earnings Won’t Last

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After topping $20 a share, Snap Inc. (NYSE:SNAP) quickly gave up half that gain on random news that shook investor confidence. Snap’s dizzying market cap of $21.4 billion was of secondary concern after Kylie Jenner’s tweet that questioned the app’s redesign. This sent Snap stock down 6%, or $1.5 billion in market cap, on Feb. 22.

What is a Snap investor to do?

Snap CEO the Third-Highest Paid CEO Ever

As Reuters reported, CEO Evan Spiegel received the third-highest compensation of any CEO last year. He earned $638 million in 2017. Is this well-deserved?

He and the management team successfully lowered costs and cut cash burn by 49% quarter over quarter in the fourth quarter. Gross margin improved to 36%. The company invested heavily in the Android application. The net result saw Daily Active Users (DAUs) rise to 8.9 million, the highest since Q3 of 2016.

How Jenner’s tweet knocked the company valuation lower by $1.5 billion may be just a random coincidence.  MoffettNathanson released a “sell” note on the stock, citing the poor app redesign. The truth about the Snap app redesign is that no one talking about the app refresh is coming out to say how much they love it. Snap stock has a lot riding on every app iteration. To sustain last quarter’s strong growth, it needed an app update that would draw more users. Since that app release was not it, the stock sold off.

User Engagement Grew Last Quarter

Ignoring the short-term noise moving SNAP stock, the fourth quarter proved the company has the potential for impressive growth. Price per impression fell by 25%, while Snap’s advertising revenue grew 38% QoQ. The company said its ad impressions grew fourfold year over year, while per-user engagement grew too. Looking ahead, Snap plans on making user growth, AR (augmented reality) and adding content its key priorities for this year.

Snap’s Moat

Believe it or not, Snap does have a unique moat that its competitors lack. Twitter, Inc. (NYSE:TWTR) centers the user experience around subjects, topics and conversations. Facebook, Inc. (NASDAQ:FB) puts friendships above everything else. It recently lowered the ranking of business-based content on news feeds in favor of friend-to-friend posts.

Snap users make billions of Snaps daily because of the features of its camera. 97% of Snaps sent on the app are done through the app’s camera. Markets are assigning a nearly $21 billion valuation because the company is ahead of everyone in overlaying an augmented reality experience with the camera. More importantly, over half of the U.S. population aged 13 to 34 years old use the AR lens on Snapchat.

Snap’s moat provided by the camera app will keep its competitors at bay. Facebook’s Instagram and Instant Messenger App will not have such a powerful AR-camera that will take Snap’s users anytime soon.

The engaged user-base will attract advertisers, potentially away from Facebook and Twitter. The company said:

In terms of the total number of advertisers on the platform, obviously it’s a key accelerator for our business. We know when we get more competition on the auction we take it. So we’re aware that we can drive pricing over the medium turn. We did double the number of advertisers on the platform, we’re still a young business with a lot of room to grow, but we’re excited by the progress in the quarter.

Source: SA Transcript

Buying Ads Made Easier

Snap’s introduction of self-service tools to reach a wider variety of advertisers is paying off. Revenue from small- and medium-sized business nearly doubled QoQ. The self-service tools are also attracting advertisers in international markets.

Snap still has plenty of work ahead in facilitating ad sales. Lens Studio will make it easier for advertisers to create Lenses. Snap Publisher is helping brands build AR-based ad campaigns.

Takeaway on Snap Stock

Snap stock’s return to growth may prove short-lived if the company does not fix the usability of its latest app revisions.

Assuming it brings back the simplicity and users come back, the company is on track to grow its highly engaged user base. Snap had close to 190 million daily active users in Q4 but has plenty of opportunities to grow.

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

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