Snap Inc. (NYSE:SNAP) has recovered most of the value it lost following earnings on April 23. Investors are getting a better sense of the company’s improving ad revenues and a user base that’s growing again. The Snapchat maker’s news of an ad partnership with Shopify (NYSE:SHOP) also helped SNAP stock rally in recent days.
Unfortunately for longs, though, is that what helps Snap the company will not necessarily help Snap the stock. Despite improved utilization of the Snapchat ecosystem, the company won’t likely show a profit for years, if ever. Also, competition from Instagram continues to loom. Given the competition and valuation issues, investors should still avoid SNAP stock.
Snap Stock Struggles Despite Growing Revenue
Admittedly, some glimmers of hope have boosted optimism in SNAP stock. While the company reported a loss in its first-quarter report, earnings came in ahead of estimates. Snap also posted a revenue growth rate of 38.9%. As it joins its social media peers in embracing an ad-supported format, it has finally started to look like a viable business. Partnering with Shopify should bolster its ecosystem.
Still, while that has caused me to rethink my previous description of Snap as “the next Myspace,” it has not changed my view on SNAP stock. My InvestorPlace colleagues have rightly pointed out what remains wrong with Snap. Yes, the user base finally showed an increase, yet it remains stuck in the 190 million to 200 million range. The company also has failed to become profitable or gain broad appeal outside of its teen and young adult demographic.
Competitor Worries Remain
My more significant worry is that it cannot escape the competitive threat faced by the 800-pound gorilla in the social media space, Facebook (NASDAQ:FB). Thanks to its control of Instagram, Snapchat has mostly failed to establish a micro niche comparable to the one that benefits Twitter (NYSE:TWTR) or LinkedIn, which seems to be flourishing as part of Microsoft (NASDAQ:MSFT). SNAP stock also faces a new peer in the market now following the Pinterest (NYSE:PINS) IPO.
Despite the marginal increase in Snapchat users, the trends appear troubling. Snapchat retains its lead among users in the 18-24 age group. However, Instagram attracted most of the overall growth. Moreover, as more above the age of 24 have entered the workforce, they become a more valuable demographic for advertisers than the core of Snapchat’s userbase.
What Weighs on SNAP Stock
Analysts predict Snap will continue to lose money until at least 2022. This means the company has to either increase debt or dilute its stock further to stay in business, let alone fund a counterthreat to Instagram.
The company has slowed its stock dilution, though shares outstanding still rose by 5.48% on a year-year basis. Snap has also declined to provide figures on its long-term debt levels. However, we do know that in the last quarter alone that “other long-term liabilities” increased to $337 million from $110 million in just the previous quarter. This compares poorly to Facebook, with a $45.24 billion cash hoard that’s almost triple Snapchat’s current $15.6 billion market cap.
Moreover, this market cap for Snap Inc stock speaks to other concerns as well. SNAP stock has fallen about 60% from its all-time high. Still, it trades at more than 12x sales and more than 7x its book value. The increased ad revenue could save Snap Inc. However, over the long run, I doubt it will generate the profits needed to keep SNAP at its current level.
Bottom Line on SNAP Stock
Improved prospects for Snap Inc will probably not bolster SNAP stock over the long term. Turning Snapchat into more of an ad platform could save Snap Inc as a company. However, its user base brings less spending power than do the users of Facebook or Instagram. Moreover, Snap will struggle to find funding if it needs money to compete more effectively against Instagram. Finally, the valuation of SNAP stock appears elevated even if the company turns a profit.
The management of Snap Inc may well have saved the company. Saving SNAP stock, however, is a separate and more difficult challenge.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.