Why Snap Stock Is Riskier Than Ever

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It’s been a great year for Snapchat parent Snap Inc. (NYSE:SNAP). SNAP stock has more than doubled as the firm moved forward with updates to its marketing approach and worked to improve the momentum of its user metrics.

Why Snap (SNAP) Stock Has Become Riskier Since Its Rally

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SNAP’s strong fourth-quarter results proved that the firm’s contentious new advertising model was beginning to bear fruit, and investors are returning to SNAP stock. But can Snapchat stock rise even further?

The Case for SNAP Stock

It’s no secret that I’ve never been a fan of SNAP stock. However, I’m willing to concede that there is a case to be made for the disappearing-message service. SNAP’s Q4 numbers were encouraging;  revenue was up 36% from the same period a year earlier, a sign that its new advertising algorithms were starting to pay off. 

Plus, the firm has a leg up when it comes to advertising sales because SNAP has made a name for itself as a great way to reach the coveted millennial generation. The firm has reportedly been looking to woo pharmaceutical companies by pitching itself as a place where millennials feel comfortable talking about more personal issues. Adding more big-pharma customers would be a huge step forward for Snapchat stock. 

On top of that, investors are starting to get excited about SNAP’s new and improved Android platform, which CEO Evan Speigel says will significantly boost its user growth. 

Not Out of the Woods

Despite all of the positive headlines about SNAP stock, it’s worth noting that the firm is still battling against lackluster user growth. User growth is  the bread and butter of social media firms and pretty much the whole reason anyone was willing to buy Snapchat stock back in 2017 when it went public.

User growth is everything for social media firms like SNAP, and unfortunately that is not one of SNAP’s bright spots. SNAP’s daily-active-user total was flat year-over-year in Q4, but that’s hardly a compelling reason to believe in SNAP stock. Instead, the owners of Snapchat stock have to rely on hopes that the company’s new Android user interface will reignite the growth of its user numbers. 

Also, I don’t really trust CEO Evan Spiegel. For one thing, SNAP has a history of confusing shareholders and asking for the owners of Snapchat stock to blindly trust it. Back in July, I pointed out that SNAP offered virtually no guidance on what it expected for the rest of the year.  SNAP has continued that practice; we didn’t see very many forward-looking statements when it announced its Q4 results, either. 

When SNAP stock made its debut, I scratched my head over the fact that it was labeled a “camera” company. But even more confusing is the fact that SNAP still labels itself that way. The non-insider owners of SNAP stock also have no voting rights, and Spiegel elected not to hold an annual shareholder meeting during the first year after SNAP went public. With all that in mind, I find rumors about a confusing and frustrating company culture very easy to believe.

SNAP Stock Has Become Riskier

On the back of strong Q4 results and renewed optimism regarding the company’s upcoming Android UI, Snapchat stock has more than doubled from its 52-week low. However I think that huge leap makes SNAP stock even riskier because it underscores the high expectations for Snapchat’s performance. Any missteps, no matter how minor, are likely to cause SNAP stock to crash. 

Could Snapchat stock make its way to $15 or $20 per share? Well, anything is possible;  however I don’t think SNAP has enough momentum to make it that high any time soon. I believe it’s more likely that SNAP stock will fall on bad news before there’s a glimmer of hope for a rally to $20. 

The most important determinant of the performance of  SNAP stock is its user growth. While the Android refresh will likely improve SNAP’s user metrics, it’s not going to be a magic fix. The bottom line for Snapchat is that it has a lot of competition, and so far SNAP has been unable to substantially differentiate itself from Instagram.

When SNAP  traded between $5 and $7 per share, there was a much better rationale for risk-hungry investors to buy the shares. But with Snapchat stock having eclipsed $11 per share, I think you’d need nerves of steel to buy it. 

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities. 

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2019/04/why-snap-stock-is-riskier-than-ever/.

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