At first look, youth-centric social media firm Snap (NYSE:SNAP) might appear as a contrarian opportunity. In late July, management delivered unexpectedly robust results for its second quarter of 2019. Following that positive news item, the SNAP stock price jumped higher. Therefore, the current volatility in shares may be due to simple market overreactions.
And many factors exist that bring a general sense of fear — or at least hesitation — among investors. First and foremost, you can’t turn on the television or surf the web without hearing about some political scandal. Beyond the heightened drama in Washington, the major indexes have had to absorb growing tensions in the U.S.-China trade war.
Obviously, these factors don’t help Snapchat stock. At the same time, bulls may argue that this is broader noise that has simply taken SNAP down in its wake. Once these issues fade, shares should move higher.
Another reason why speculative bulls may find confidence in the currently weakened SNAP stock price is collective commiseration. Specifically, Snapchat stock isn’t the only victim among social media firms. The undisputed sector leader, Facebook (NASDAQ:FB), has been volatile ever since Snap released its Q2 results. Additionally, the presidential platform Twitter (NYSE:TWTR) has absorbed a decline since early September.
Stated differently, most investors presumably would question SNAP stock if it were the only volatile social media investment. Clearly, it’s not. So, once this sector noise fades as well, Snapchat should resume the upward trajectory that its second-quarter report implied.
While I respect the company’s turnaround efforts — Snapchat stock is up a remarkable 175% year-to-date — the broader picture suggests caution. Let’s have a look at why.
Narrow Demo a Liability for SNAP Stock
While social media has transformed our lives, we must remember one thing about the companies that provide such services: they live and breathe on traffic.
Without it, you have no interest. Without interest, you have no engagement. And without engagement, you simply don’t have a case to present to advertisers as to why they should risk their marketing dollars on you. That’s the universal narrative behind Snapchat stock and its peers.
Of course, I’m not breaking new ground with the above statements. However, if the broader markets continue to fall — the Dow Jones Industrial Average lost 3% through mid-week — it spells economic troubles. If that’s the case, advertisers will almost surely tighten their belts. Unfortunately, that wouldn’t spell great things for demographically narrow social media investments like SNAP stock.
Here are some statistics that I found quite interesting, courtesy of Omnicoreagency.com:
- “69% of U.S. teens say they use Snapchat” compared to “24% of U.S. adults use Snapchat.”
- “41% of U.S. teenagers say Snapchat is their preferred social media platform” compared to “20% of U.S. college students use Snapchat.”
- “90% of Snapchat users are 13-24 years old” compared to “39% of Snapchat users are ages 18-24.”
What’s the common pattern here? The older you are, the less likely you are to find value in Snapchat. Logically, this is a big problem for the SNAP stock price longer term. While advertisers and marketers may target youth, youth by itself doesn’t do much.
Indeed, I argue that it’s more of a liability unless you can retain the young demo as they age. After all, the older you get, the more income you’re likely to earn, which benefits advertisers. But there’s no evidence that SNAP is making inroads with the older crowd.
Not Just a Problem for Snapchat Stock
Bear in mind, I’m not picking on SNAP stock arbitrarily. Recently, I used the same argument against Pinterest (NYSE:PINS).
Like other publicly traded social media names, Pinterest shares have tumbled over the last few weeks. However, what makes PINS riskier than Facebook or Twitter is their demographic situation: Pinterest caters heavily toward women.
Don’t read this like I have something against women or young people. Rather, put yourself into the shoes of a prospective ad client. Under a strained economy, you must have your dollars stretch to the widest degree possible. But with Snapchat and Pinterest slanted mightily toward youth and females respectively, these two platforms aren’t ideal.
That said, I’m not opposed to picking up Snapchat stock on a dead cat bounce play. But until management figures out its demo situation, I don’t view SNAP as a confident investment.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
