Since its IPO a couple years ago, Snap (NYSE:SNAP) has had a rough journey. While SNAP stock got off to a strong start – jumping a sizzling 40%+ on its debut – the gains proved to be temporary. The SNAP stock price would soon come under pressure from the company’s continued losses, sluggish user growth and very tough competition from Facebook’s (NASDAQ:FB) Instagram.
But this year, things have certainly perked up for SNAP stock. Keep in mind that the return of Snapchat stock so far this year is an impressive 175%!
Are SNAP’s Issues Company-Specific?
Yet lately there has been more selling of SNAP stock. But of course, for the past few months, the volatility of most tech stocks has risen. Just last week, there were notable implosions by Pinterest (NYSE:PINS), Etsy (NASDAQ:ETSY) and Wayfair (NYSE:W). Undoubtedly, Wall Street has been getting more cautious about tech stocks.
So is the recent drop of SNAP stock price just temporary? Or should investors be concerned about it?
For the most part, Snap’s business seems to have lots of momentum. In the latest reported quarter, its revenues jumped 50% year-over-year to $446.2 million. Its loss, excluding certain items, was a modest 4 cents per share of Snap stock (that beat analysts’ average estimate by 1 cent).
The Key Factors Behind the Rebound of Snap Stock Price
A big key to the turnaround of SNAP has been its major investments in ad systems. Those initiatives essentially came from the proven playbooks of other mega websites like Facebook and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). And for the most part, it looks like Snap has executed the strategy very well.
Meanwhile, Snap’s user growth has gotten back on track. In Q3, Snap added about 7 million daily active users (DAUs), bringing its total DAUs to 210 million. That was its third consecutive quarter of growth. Among the keys to its growth were a retooling of its interface, adding some new features and services, and improving its Android app.
The Issues Facing SNAP Stock
So Snapchat stock certainly has some strong positive attributes. Yet its positive catalysts may ultimately not be enough to lift Snap stock price further. For example, its user base skews mostly towards younger age groups.
Granted, SNAP is valuable for a host of brands that have a difficult time reaching young people. But on the other hand, Snap’s brand may have difficulty expanding beyond its niche. As a result, the company’s user base may already have largely peaked, following in the footsteps of Twitter (NYSE:TWTR).
Next, competition is another major problem for SNAP stock, and that issue only seems to be getting more intense. The fact is that Instagram remains the dominant app when it comes to photo sharing. What’s more, the latter website has done an amazing job of copying Snap’s new features.
Then there’s the stratospheric rise of the TikTok app, which has been making huge inroads with SNAP’s core demographics. While SNAP CEO Evan Spiegel has downplayed the threat from TikTok – indicating that the companies have a strong partnership – the owners of SNAP stock should still be concerned about the upstart app. When it comes to consumer mobile apps, loyalty can prove short-lived, and Snapchat has been around since about 2011.
The Bottom Line on Snap Stock
Snap’s management has done a fine job with its turnaround efforts. But the easy gains of Snap stock price may be over. Going forward, competition and the company’s narrow user base are likely to remain major problem for SNAP. And besides, the valuation of SNAP stock remains at lofty levels, as its price-sales multiple is close to 14. In other words, there is really no urgency to buy SNAP stock now.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.