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The Rally of Snap Stock Could Disappear Faster Than a Snapchat Photo

A recession and competitive headwinds could reverse the gains of SNAP stock

Snap (NYSE:SNAP) stock has defied the predictions of many analysts, myself included, and made a comeback. The social media company has become more successful by offering new functionality and making its platform more useful to advertisers.

With Spectacle 3, Snap Stock Is All Set for Another Major Failure
Source: ArthurStock / Shutterstock.com

However, SNAP stock price has slid in recent weeks, and worries about SNAP”s competition have returned. Given the formidable headwinds this company could face, investors should consider avoiding Snapchat stock.

SNAP Stock Price Climbed for Most of the Year

In my previous article, I predicted  that SNAP stock price would  have an “extreme” reaction to the company’s second-quarter results and would be more likely to drop than rise. I predicted the extreme nature of the move correctly,  but I was wrong about the direction of the change in SNAP stock. Nonetheless, I’m sticking by my bearish view.

SNAP stock price hovers near $16 per share, well above the level at which it traded when my previous article was published on July 19. However, SNAP stock price has declined meaningfully from its late July peak of $18.35.

I once hated SNAP stock to the point that I compared it to MySpace on more than one occasion. To its credit, Snap finally made the platform changes that drew advertisers to its site. These changes, along with other additions to Snapchat, helped it stop  its user base from declining further. As a result, SNAP stock price reached its highest level since early 2018.

In February 2018, SNAP stock price peaked at $21.22 per share before beginning the descent that would take it to its $4.82 per share low of last December.  Some are now wondering if SNAP will retest the $21 per share level or if SNAP stock’s highs are trending lower.

Snapchat Faces Significant Headwinds

However, even SNAP stock bull Nicolas Chahine admits that the equity will need support from the overall markets to rise further. The market has historically struggled — and occasionally crashed — in both September and October. Moreover, the ongoing U.S.-China trade war and the inverted yield curve lower the chances of  the markets  supporting Snapchat stock.

InvestorPlace contributor Josh Enomoto identified “recessionary fears” as another reason why investors should sell SNAP stock. He noted that a recession would  likely cause ad spending to decline. Furthermore, a recession would badly hurt the low-income teens and young adults on which SNAP depends, Enomoto added.

Competition from Facebook (NASDAQ:FB) is another negative for Snapcjat stock, according to Enomoto. In  Facebook’s latest strike at  Snap, the social media giant added the Threads app, which mimics a number of Snapchat features, to Instagram.

I have argued that Facebook is far superior to Snapchat and websites such as Twitter (NYSE:TWTR) and Pinterest (NYSE:PINS). Consequently, the owners of SNAP stock should regard increased competition from Facebook as a negative.

Despite this bleak situation, those who buy SNAP stock now must pay about 15.5 times its sales. That seems like a high price for a company that’s unlikely to become a market leader. Analysts also do not expect SNAP to become profitable until at least 2022. A recession may push that point further into the future, and competition from Facebook could delay it indefinitely.

Final Thoughts on SNAP Stock

Snapchat stock has benefited from Snap’s new ad platform and the return of user growth.

However, emerging headwinds could easily reverse those trends, making the bullish move of SNAP stock unlikely to continue.  The overall market probably won’t help SNAP. Furthermore, Facebook has again begun to chip away at Snapchat’s core teen and young adult market, and SNAP is expected to continue losing money for years

At its current levels, SNAP stock has become dangerous to own. Traders should sell Snapchat stock before their investment dollars disappear like their Snapchat photos.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/snap-stock-rally-disappear-snapchat/.

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