Is Snap Inc Stock Really Just a One Quarter Wonder?

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SNAP - Is Snap Inc Stock Really Just a One Quarter Wonder?

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By now, the perfect nickname for Snap Inc (NYSE:SNAP) stock is “One Quarter Wonder”.

A few months ago, SNAP reported blowout fourth-quarter numbers that sent the stock soaring to $20 and up. Everyone was talking about it turning into the next Facebook, Inc. (NASDAQ:FB). Euphoria was high. Sentiment was strong.

But that seems like forever ago.

Yesterday, SNAP reported Q1 numbers. They looked nothing like those blowout Q4 numbers. Instead, they looked a lot like the numbers investors had seen in the prior three quarters.

Slowing revenue growth. Slowing user growth. Growing expenses. Widening losses. Cautious guidance.

The scary thing about the report is that Facebook just delivered one of its best earnings reports ever. Meanwhile, Alphabet Inc (NASDAQ:GOOG) and Twitter Inc (NYSE:TWTR) both just reported exceptionally strong ad revenue growth numbers in their recent earnings.

Clearly, SNAP is still an afterthought when it comes to digital-ad spend.

That isn’t great news for SNAP stock, which just opened up at a record low.

What’s next for the stock? The weakness will likely persist. Here’s why:

Snap’s Quarter Was THAT Bad

The bull thesis on SNAP is threatened by weakening user and unit revenue growth trends against the backdrop of strengthening trends over at Facebook and Twitter.

Facebook’s ad-revenue growth accelerated to 50% last quarter, while Twitter has turned its ad revenue business around from persistent declines to 20%-plus growth last quarter. Meanwhile, Facebook continues to grow both its daily and monthly active users bases at a low-to-mid teens rate, while Twitter actually added 6 million new monthly users last quarter, its best mark in a year.

The story is much different at Snapchat.

Ad revenue growth has come down from 286% a year ago and 72% last quarter to 54% this quarter. Daily active user growth has followed a similar trend, dropping from 36% a year ago and 18% last quarter to 15% this quarter.

It gets worse if you really break down the numbers.

Snapchat added only 1 million new users in North America last quarter. That is anemic. Especially considering that Snapchat is still relatively small.

International growth wasn’t that much better. The company added just 3 million new users in the quarter, versus 6 million last quarter. That is especially troubling because international growth was supposed to pick-up with a new focus on Android. But that focus is hitting road-bumps, and as such, international user growth trends are still weakening.

Meanwhile, Snapchat is having trouble monetizing its user base. Average revenue per user growth in the valuable North America market was just 16%. Over the past several quarters, that growth rate has been between 20% and 30%. Worse yet, that growth rate will slow down big time in the near future as management expects revenue growth to decelerate meaningfully over the next several quarters.

Under Hood, SNAP’s Problems Don’t Look Immediately Fixable

Before this quarter, it looked like SNAP was turning into a go-to digital advertising platform for small-to-medium sized businesses seeking max engagement among the teenage and young adult demographic.

I still think that is true. User growth is still positive, and international growth should get a kick-start in Q3 with a new Android app roll-out. More importantly, time spent on the platform remains over 30 minutes per day.

In other words, this is still a high engagement platform with a growing user base. Consequenty, the thesis that Snap is turning into a go-to digital advertising platform targeted at teens and young adults hasn’t been entirely dismantled.

But the quarter does show that this thesis needs a footnote. That footnote is that Facebook’s Instagram will be the market leader in the teenage and young adult demographic, with Snapchat playing second fiddle. Because of this, Snap’s problems don’t look immediately fixable. They are largely the result of a competitor who is far bigger and has far more resources.

So long as these struggles continue, SNAP stock will remain depressed.

Bottom Line on SNAP Stock

If you’re a long-term investor, buying here may not be the worse idea. This story will get better over the next several years as the redesign moves into the rear-view window, the Android app roll-out leads to revamped international user growth, and unit revenue growth trends improve with rising engagement.

But those catalysts are still a ways off. In the meantime, investors are stuck looking at a train that looks like it’s about to come off the tracks.

As such, I’d avoid SNAP stock in the near-term. Once the dust settles, though, there could be an opportunity to buy shares at record lows.

As of this writing, Luke Lango was long FB and GOOG.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/snap-inc-stock-really-just-one-quarter-wonder/.

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