Social media company Snap (NYSE:SNAP) has been churning out quite a bit of good news in recent weeks. At the end of June, news that the company was planning to add rich new features to its platform helped propel Snap stock and the firm carried on in July with news about a new media partnership and encouraging second quarter results.
However, the stock is still languishing around $13 per share; it is a far cry from the $27 per share it was commanding during its IPO and no closer to its 2018 high of $20 per share.
With all that good news out there you’d think SNAP would be looking appealing to shareholders but interest in the social media platform has been tepid at best.
The trouble is that none of this “good news” will do much to assuage investors’ biggest worries about the company. The worry some investors have it that management can’t be trusted and, more important, that competition will leave Snap in the dust.
A Look at Snap Stock
Take Snap’s announcement that it would add a gaming platform to its service. Snap is planning to introduce augmented reality games that allow users to compete with their friends by doing things like raising their eyebrows as many times as possible in a set time period.
The potential of adding simple augmented reality games is really only the beginning of a larger growth opportunity, adding a gaming platform that makes use of augmented reality could be a major boon for Snap stock as the company expands its offerings.
The trouble here is that Instagram, which is owned by competitor Facebook (NASDAQ:FB), is likely to roll out the exact same offering. We’ve come to expect Instagram to follow Snapchat’s lead with a, “anything you can do, I can do better” attitude and so far that has been working.
Instagram has a much larger reach, more money and a much larger, more stable company backing it and that has made it relatively easy for the platform to copy Snapchat’s popular features in order to keep its own users from switching.
Second Quarter Earnings
Earlier this month, Snap stock saw its share price rise upon the release of Snap’s second quarter results. While sales came in below analyst forecasts, earnings impressed and profit margins soared. The lower tax rate also contributed to the earnings beat and the firm saw additional benefits from a lower tax rate due to the new tax code.
So why didn’t the share price fly higher? It’s tricky to deduce exactly what Mr. Market is thinking, but my guess is investors still don’t trust Snap and its management. The company lacks transparency and has done since it went public and confused investors by calling itself a “camera company.”
The second quarter results for were encouraging, to be sure, but management provided virtually no forward guidance for what to expect for the rest of the year. That should raise red flags for anyone interested in Snap stock, past performance is helpful in determining whether a stock is worthwhile, but it’s the future that investors really care about.
Plus, not only do shareholders have no voting rights, but Snap opted out of holding an annual in-person shareholder meeting, offering instead an online version allowing shareholders to tune in.
While there’s a lot of debate regarding whether or not in-person meetings are really worth the trouble, it’s important to note that this was Snap’s first annual meeting since going public and management’s decision further underscores the fact that shareholders have no real rights when it comes to how the company is run.
In short, it makes the company look like it cares even less about its shareholders than it already appeared.
Media Partner
Finally, earlier this week Snap announced that it would partner with LGBTQ news site PinkNews to offer users daily content from the site beginning in October. The partnership is expected to help PinkNews monetize its platform by selling ads, which it will in-turn share with Snapchat.
Again, this isn’t bad news for Snap. In fact it’s the opposite. Not could does the PinkNews partnership entice users from the LGBTQ community to become active Snapchat users, but there’s revenue potential there as well.
However, much like the augmented reality games, this isn’t something that Instagram can’t do as well. There’s nothing unique to Snapchat here that should cause investors to celebrate, and that’s exactly what happened. When the news broke Snap stock made no upward movement.
The Bottom Line
Even though Snap has declined since its IPO, it still trades at 18 times its sales, which is expensive when you compare it to the broader market. Snapchat’s future user growth is uncertain at best, and the company has very little going for itself that sets it apart from its larger, better funded competition.
I’m also wary due to the fact that management doesn’t appear to be very shareholder friendly, so the firm would have to come out with something groundbreaking for me to change my tune.
As of this writing, Laura Hoy was long FB.
