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3 Reasons Why I’m Not Buying the Snap Inc Stock Rally

One of the most surprising revelations this year is Snap Inc (NYSE:SNAP). Last month, I warned investors that Snap stock would be a disappointment. So far, the only thing that has been disappointing is my forecast. Year-to-date, SNAP is up 28%, easily leading its social media rival Facebook Inc (NASDAQ:FB).

3 Reasons Why I’m Not Buying the Snap Inc Stock Rally
Source: Shutterstock

To be fair, some of the bullishness towards SNAP stock is well deserved. As our own Bret Kenwell explained, the trendy, Millennial-centric app company posted surprisingly good numbers. Earnings per share came in at a loss of 13 cents, which was three cents higher than expectations. Top-line sales was nearly $286 million, beating analysts’ forecast by a healthy margin of nearly 13%. In addition, this represented 72% year-over-year growth.

Kenwell further wrote that “On the user front, Snapchat’s daily active users grew 5% quarter-over-quarter and 18% year-over-year to 187 million.” Since social media companies live and die by user volume and engagement, these figures were perhaps the most critical.

Indeed, one of my central criticisms against Snap stock was that Snapchat was “demographic hell.” More so than any other social media company, including Twitter Inc (NYSE:TWTR), SNAP caters sharply to younger generations. This is all fine and dandy from a popularity perspective. But when you want to attract advertisers, the young demo is a liability.

By far, the company’s stronghold is the 18-to-24 age group. This also happens to be the age group that is most vulnerable to financial pressures, such as student loan debt and finding a high-paying (or even adequately paying) job.

Unfortunately for Snap stock, user volume falls off a cliff after age 34.

User Volume Not Impressive Enough for Snap Stock

I’m not convinced that Snap Inc stock will maintain its present bullishness. Furthermore, I believe that the markets are reading too much into the “positive” user growth data. In reality, the data is extremely mundane.

Snap Inc stock, Snapchat DAUs
Click to Enlarge
Source: Source: JYE Financial, unless otherwise indicated

In my chart, the first section is between 40 million and 80 million DAUs, or 100% growth. The next section is 80 million to 120 million, or 50% growth. The next, 120 million to 160 million, or 33% growth. Finally, we have 160 million to 200 million, or 25% growth.

While Wall Street is going nuts about Snapchat hitting 187 million DAUs in Q4, I only see 5% growth quarter-to-quarter. On a year-over-year basis, I see a relatively pedestrian 18% growth rate.

Snapchat’s user volume is slowing considerably from its heyday, and that’s a problem for the SNAP stock price.

SNAP Stock Still Has a Demographic Problem

Snapchat has always catered to the young, and I don’t think that’s going to change. However, SNAP stock will have to deal with the consequences of a different demographic problem.

Critics have consistently pointed out that Snapchat gains most of its revenues from the U.S. market. But for management, this problem was an opportunity to change hearts and minds. Unfortunately, the latest Q4 earnings report didn’t change anything.

European Snapchat DAUs increased 15% YOY. In the rest of the world, that figure jumped to 20.5%. On the surface, these data points indicate international traction and a potential boost for the SNAP stock price. But in a broader context, enthusiasm for Snapchat is already maturing.

Again, the company’s total DAU haul is 187 million. That’s less than 60% of the U.S. population. In contrast, Facebook’s total DAU is 1.4 billion, or roughly 20% of the earth’s population. Moreover, its YOY daily-user growth rate is 14%, which is within striking distance of Snapchat.

No Traction with the SNAP Stock Price

I’ll admit that the sudden burst in Snap stock startled me. If the company had posted great news, I figured a good bump was a fair result. However, I wouldn’t consider a nearly 50% move to be fair or reasonable.

While I look silly now with my earlier bearishness, I think speculators will be singing a different tune. Since the post-Q4 lift, we have seen no new ground with the SNAP stock price. Furthermore, all the subsequent trading sessions occur inside the total price range of the post-Q4 session.

That’s weird. If investors truly believed in SNAP, I’d expect them to be encouraged with the quarterly results. For some reason, they’re not, which is a major red flag for me. The social media company has enjoyed a phenomenal run, but I think this is fundamentally and mathematically irrational.

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

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