3 Reasons Why You Should Snap Out of SNAP Stock

Without a doubt, youth-centric social media firm Snap (NYSE:SNAP) is one of the surprise comeback stories of 2019. It was a completely different story last year. Excepting a brief pop in February of 2018, SNAP stock incurred a horrific collapse in the markets. Now, it’s made up those losses from last year January, and then some.

With Spectacle 3, Snap Stock Is All Set for Another Major Failure
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Just as importantly, the bulls have more than technical sentiment to justify their enthusiasm in Snapchat stock. In July, the company released its earnings results for the second quarter of 2019. Paring per-share profitability losses to 6 cents against an expected 10 cents, SNAP also added 13 million daily active users.

Given the robust performance in Q2, it might tempt investors to finally believe in SNAP. Unfortunately, with a potential recession around the corner, the social media firm looks vulnerable to a pullback. Here are three reasons why I’m taking a pass on SNAP:

SNAP Stock Faces Constant Competitive Threats

Generally speaking, the SNAP stock price has benefitted from the underlying company’s brand power: it’s young, fun, and lends itself to heavy engagement among its core users. I’m not going to hate on the social media firm for working that angle. Clearly, they got this act down pat.

But it’s also fair to point out that it’s not a particularly unique act. For years, social media king Facebook (NASDAQ:FB) has decisively won every demographic group except teenagers and young adults. Understanding this point, Facebook quit trying to beat out Snapchat head-to-head. Instead, the company bought out Instagram, which has similar features to Snapchat.

With Instagram under its belt, Facebook started a proxy war with Snapchat, and by logical deduction, Snapchat stock. Essentially, Instagram copycatted SNAP’s key features that resonated with young users.

And now, they’re back at it again. According to industry reports, Instagram is working on a new messaging app called Threads. The idea here is to generate the rapid-fire and consistently recurring engagement for which Snapchat is known.

If I held a significant position in SNAP stock, I’d be worried. With 2.4 billion monthly active users, Facebook subscribers roughly account for 32% of the world population. There’s just not much room to expand internationally.

But what FB will focus on is the demographic that got away: young people. With comparatively unlimited resources, I’m not sure what SNAP can do to avoid a competitive onslaught. Thus, I’m cautious on Snapchat stock.

A Recession May Disproportionately Hurt Snapchat Stock

Currently, SNAP is the decisive leader among publicly traded social media firms. Even after shares slipped noticeably following its Q2 2019 earnings results, they have still turned in a massive profit for stakeholders. Since the beginning of this year, the SNAP stock price has skyrocketed over 193%.

But will Snapchat stock maintain the lead deep into a recession? I’d argue not.

Social media companies often live or die by advertising dollars. In a downturn, companies will want to make sure their ad spend is most effectively allocated. This potential situation also doesn’t help Snapchat stock, as the underlying company is strongest among the very young (who typically make less money as it is). And so in a recession, companies are likely to cut ad spend on Snapchat ahead of Facebook or YouTube.

Historical Volatility Will Scare off Most Investors

While SNAP’s robust Q2 earnings demonstrated the company’s potential, it wasn’t enough to overcome one nagging criticism: SNAP stock is extremely wild.

From the moment of its initial public offering, Snapchat stock has been at constant war with Wall Street. It’s almost as if the equity was actively attempting to justify its rich premium.

But what’s crazy about SNAP stock is that this is truly a time-sensitive investment. In other words, if you don’t get out at the right time, you’ll probably incur a loss. As a prime example, look at SNAP’s IPO price of $17. With all that huffing and puffing, shares are largely flat to declining.

Most likely, the smart money recognizes this risk. Furthermore, they’ll see that Snapchat doesn’t offer the utility that other platforms have, which will be significant in a downturn. Therefore, they’ll probably avoid Snapchat stock, meaning you should too.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/3-reasons-why-you-should-snap-out-of-snap-stock/.

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