It’s been a year since Snap Inc (NYSE:SNAP) pulled off its IPO — and yes, it looks like the company is finally getting its footing. Although, in terms of the stock price gains, they are still fairly muted. Consider that since its IPO, Snapchat stock is only up 6% to $18.
Yet the latest earnings report was certainly encouraging. Revenues soared by 72% to $285.7 million, and the loss fell by about 20%.
Now one of the key drivers has been Snapchat’s automated advertising system, which has made the process much easier and effective. During the quarter, more than 90% of ads were pushed through the platform.
Next, SNAP has been getting more traction with its Android app, which has helped to perk up the user base. This should also be important for the company’s efforts to move into foreign markets.
However, despite the good news, I still think investors should be cautious with SNAP stock. No doubt, the social media world is volatile. So yes, making an investment decision based on a single quarter can be a big-time risk.
Let’s take a look in more detail.
Snapchat Stock Issue #1: Is the App a Fad?
One of the big attractions of Snapchat is that its core demographic is for those between the ages of 18-24. This group is tough to target. After all, according to Snapchat’s own research, a video ad often needs to be less than 10 seconds!
Yet the youthfulness of Snapchat also has its downsides. First of all, it is essentially a niche, which limits the potential for growth. This has certainly been the case with Twitter Inc (NYSE:TWTR).
Then there is the competition. As should be no surprise, there are many new apps that are spinning out of Silicon Valley. Although, the biggest threat is actually from Facebook, Inc. (NASDAQ:FB), whose Instagram app has knocked off many core features of Snapchat. While this may seem unfair, the strategy has worked. Instagram Stories has 300 million daily users.
Finally, Snapchat could ultimately prove to be a fad. As seen with MySpace and other hot properties that cater to young people, the novelty can wear off quickly.
Investors in SNAP stock got a hint of this when socialite Kylie Jenner tweeted this about the app: “Sooo does anyone else not open Snapchat anymore?”
True, she backed off from this pronouncment. But still Snapchat stock took a hit. All in all, it shows that Wall Street is still far from convinced about durability of the company.
Snapchat Stock Issue #2: Culture
Snap CEO Evan Spiegel has done a tremendous job in creating a popular app. However, his management style — which is reported to be divisive — may ultimately make it difficult for the company to continue to grow.
Keep in mind that there has been quite a bit of turnover in the executive suite. According to Bloomberg.com, there have been the departures of five vice presidents and the general council during the past year.
Something else: Spiegel denied cash bonuses to employees last year. But as for himself, he earned a whopping $638 million!
Might this cause some consternation? I think so. Let’s face it, the market for tech talent is intense. So why would SNAP employees stick around if there are many other opportunities?
Snapchat Stock Issue #3: Valuation
The valuation of Snapchat stock is at nose-bleed levels. Consider that it is valued at 27 times revenues. To put this into perspective, FB sports a multiple of 13X, and Alphabet Inc (NASDAQ:GOOGL) trades at 7X.
Wall Street analysts are also skeptical with Snapchat stock, with the average price target at $15.60, which implies about 13% downside from current levels.
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.
