Stuck in a downtrend since August, Snap Inc. (NYSE:SNAP) is not keeping up with its competitor, Facebook (NASDAQ:FB). Still, the SNAP stock price may head lower and should not underperform as poorly as Twitter (NYSE:TWTR) did. Let’s take a look at Snapchat’s near-term prospects.
Snapchat’s community grew to 210 million daily active users, up 13% year-over-year. Revenue grew a solid 50% Y/Y, which represents three consecutive quarters of revenue growth acceleration.
Strong user stickiness suggests the business will continue growing at this pace. Users, on average, open the app 30 times a day. The form factor of communicating with rich tools keeps its users active on the platform. Instead of sending text messages, friends share videos.
Snapchat enhanced visual communications by building an augmented reality platform, a social map, and a new gaming platform. On the content side, the Discover channel with NFL’s Sunday football highlights proved successful. Users watched the content 40% more than last year and spent 70% more time watching the NFL highlights.
SNAP Stock Falls
Snap’s weak fourth-quarter revenue guidance disappointed investors. SNAP stock fell because Q4 revenue will come in below the $553.6 million consensus forecast. The revenue range will be $540 million – $560 million. Even with the lower revenue range, adjusted EBITDA is between break-even and $20 million.
At all-time highs, markets as a whole are choosy on which stock deserves a premium valuation. SNAP stock has a market capitalization close to the $20 billion range, is eight years old and is only now promising break-even profits. Justifying its losses every quarter is getting more difficult than ever.
The company’s messaging app has no moat. Facebook continues to offer nearly identical Snapchat-like features on Facebook, Facebook Mobile, WhatsApp and on Instagram.
Snap reaches 90% of 13 to 24 year-olds and 75% of the 13 to 34-year-old markets in the U.S. The strong audience should still compel advertisers to consider the Snap platform in addition to Twitter and Facebook.
Technological Developments
Augmented reality (AR) is a new field that may differentiate Snap from other messaging platforms. The company believes AR will drive its business in the coming years. So, as it distributes Lens Studio to help its creators and the communities, Snap’s DAU may increase.
Snap’s community created over 600,000 Lenses in Lens Studio so far. And the top-performing community Lenses reached billions of views on Snapchat. In addition, if users spend more time on the app, their value to advertisers will increase. This may drive ad revenues higher.
In seven to ten years, wearable AR will become common. In the future quarters, Spectacles 3, Snap’s new camera glasses, will further enable creators using Lens Studio to build new Lenses. But in the near-term, the company is building a low volume of these wearables to test and learn more about wearable computing.
Headwinds
Snap’s costs continue to pressure potential profits. In the third quarter, operating expenses rose 11% Y/Y to $271 million. As a growth company, higher expenses are the norm and if new technology is implemented well, long-term growth will follow.
Free cash flow improved by $75 million to negative $84 million. Snap ended the quarter with $2.3 billion, up by $1.1 billion from last year. This increase is due to a convertible offering completed in Q3 of this year.
Your Takeaway
Snap’s user growth still justifies the high valuations but risks are high that Snap stock may face a correction. If the sock fell while market indices traded at new highs, then a market correction could send Snap stock even lower.
Despite the market risks, Snap may continue reporting impressive revenue growth. As more advertisers choose the Snapchat platform, investors may continue buying the stock on every dip.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
