You can cheat the fundamentals for a while, but eventually, they’ll come back to bite you. That’s the lesson investors should learn from Snap Inc (NYSE:SNAP). While its Snapchat app has proven consistently popular with the young, college-aged demographic, SNAP stock is another story. It got off to a brilliant start earlier this year, but now, we’re back to square one.
I’ll freely admit that I got a little concerned. In early January, I stated emphatically that Snapchat “will be a disappointment in 2018.” I was certain that despite the company’s rabid fan base, it was demographically unbalanced. The kids love their rainbow puke feature, but at a certain point, they grow up. When they do, they invariably pick Facebook, Inc. (NASDAQ:FB).
Then came the fourth quarter earnings report. From a strictly technical perspective, it wasn’t great. Earnings per share came in at a 13-cent loss. It was, however, three cents higher than expected. Furthermore, revenues jumped sharply, while its daily active users (DAUs) grew 5% quarter-over-quarter.
Despite SNAP stock blowing up my earlier forecast, I stuck with my guns. Not only did I reaffirm my position on the demographic imbalance, I also pointed out that DAU growth was not that impressive. While the needle was moving forward, the momentum was clearly dying off. Facebook had better growth prospects, which is weird because relative to Snapchat, it’s old and stale.
But because the company was experiencing difficulties with Facebook, the social media king’s Instagram app became more problematic for SNAP. While Facebook owned the older millennial crowd, Instagram began encroaching on Snapchat’s youthful user base.
We know through history what happens when you fight a dual-front war. I’m afraid it’s lights out for SNAP stock.
Snapchat Was Fundamentally Exposed
The only caveat I can offer to my renewed bearishness toward Snapchat is investor sentiment. The markets can do some silly things, like buying into the Q4 earnings report full throttle. I try to account for all things, but human irrationality is something that has baffled the greatest minds in history.
That said, I think it’s time to consider the real possibility that SNAP stock just experienced its last solid run. The main problem I see right now is that Snapchat is increasingly a less attractive platform. The company’s primary selling point is that several advertisers loved its demo. But with SNAP’s growth declining and Instagram soaring, the former is losing relevancy.
Instagram has over 800 million subscribers, with 500 million using the platform daily. More importantly, this photo-sharing app’s “Stories” feature has over 300 million DAUs. To put that into perspective, Snapchat at last count had less than 200 million total DAUs.
It gets worse for SNAP. Instagram launched Stories to directly compete with Snapchat’s original storybook feature. This was the one attribute that distinguished the embattled firm from would-be challengers. Now, Instagram has taken the upper hand, and it’s not letting go.
In October 2016, Instagram Stories had 100 million DAUs. After exactly one year, it tripled its active user count. In sharp contrast, Snapchat only gained a measly 18.4% during the same time frame. Moreover, going back to at least Q1 2014, SNAP has never experienced triple-digit percentage growth in DAUs.
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Again, SNAP is losing relevancy, and the hard numbers reflect it. Unless the company experiences a radical paradigm shift, I can’t justify risking any money in SNAP stock.
It’s All About the Benjamins
Snapchat bulls, if any exist, may counter that Facebook’s political woes may end up hurting Instagram. I’ll concede that this drama is unfortunate and unnecessary. I’ll even say that FB got a little arrogant, and they’re hurting because of it. But please don’t overreact to the headlines. At the end of the day, it’s all about the Benjamins.
How many people realistically are going to actualize the #DeleteFacebook movement? If ten million people decided to leave Facebook permanently, that wouldn’t even scratch the company’s two billion active users. You’d have to wipe out the entire U.S. population to get Facebook to the negotiating table, and come on! That will never happen, and you know it.
When the drama finally fades, advertisers will still advertise on Facebook because that’s what you do to succeed. Politicians will huff and puff, but it’s all gamesmanship. No one dares touch Facebook, in part because politicians particularly benefit from the company’s data goldmine.
This is a long-winded way of saying Instagram wins. Snapchat loses. Thanks for playing!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
