Amid the discourse of trade wars and interest rate decisions, 2019 is likely to end with more market volatility. As we welcome November, investors in the California-based Snap (NYSE:SNAP) stock are wondering what may be next for the share price. Year-to-date, SNAP stock is up over an eye-popping 170%.
Many investors know Snap by its Snapchat app — the self-deleting messaging service. Snapchat is a social media platform where users can create and send photos to others.
On Oct. 22, Snap released third-quarter 2019 financial results. Now that another important earnings season is behind us, I do not expect Snap to reach new highs in the coming weeks. Here is why.
How Snap Stock’s Q3 Earnings Came
Wall Street was overall pleased with the key metrics in Snap stock’s Q3 statement. Revenue increased 50% to $446 million in Q3, compared to the prior year. Losses were also slightly less than what investors were expecting.
The photo- and video-sharing app has been increasing the number of daily active users (DAUs). The number came at 210 million in Q3 2019, compared to 203 million DAUs in Q2 2019 and 186 million in Q3 2018.
Management reported that higher DAU numbers have also translated into increased engagement levels, especially in “Discover,” which features professionally created content, including Snap Originals. Snap has been busy building out its Discover offerings with original content through partnerships with dozens of publishers.
Over the years, Snap has become a player in the online advertising business segment. Therefore, investors cheered this highlight in the financial results as increasing engagement with premium content is an important source of revenue.
It would be fair to say that the group has so far had three consecutive impressive quarters. Nonetheless, SNAP’s guidance for Q4 was less than impressive.
The social media company now expects revenue for the quarter to come between $540-$560 million. Yet Wall Street was expecting $555.4 million. Therefore Snap is likely to face a rather uphill battle to reach expectations.
Financial Headwinds for Snap Stock
Despite the robust Q3 numbers, many analysts are still wondering if Snap stock deserves the current high valuation.
For example, the balance sheet and the income statement of Snap Inc stock would give most investor a pause for concern: so far, the company has burned through a lot of cash to make some money. It is not positive cash flow yet and possibly will not be so any time soon.
Our readers may remember that soon after its Q2 earnings release in July, Snap had to raise more than $1.1 billion in convertible senior notes due in 2026. Management said that the proceeds would be used to fund capital expenditures, operating expenses, stock repurchases, and acquisitions.
Investors were not exactly impressed with this level of private debt offering. In other words, Snap’s business model is still a high cash-burn model that poses risks in the long-run.
When Snap may become profitable is one of the most important questions for long-term investors.
Competition Remains Intense
In the ever-evolving social media space, Snap faces competition from Facebook’s (NASDAQ:FB) Instagram, Twitter (NYSE:TWTR) as well as TikTok – a subsidiary of Chinese parent-company ByteDance, whose ecosystem extends far beyond TikTok.
However, among these three U.S.-based publicly traded companies, Snap’s price-to-sales ratio of about 13.3x is the highest. However, P/S ratios for FB and TWTR stocks are 8.8 and 6.9 respectively. To put the metric into another perspective, the S&P 500’s average P/S ratio is 2.2x.
According to research by Saleem Alhabash and Mengyan Ma of Michigan State University, “Facebook remains popular among young adults, yet it is being abandoned by teens migrating to Instagram and Snapchat.”
Indeed, the battle between Instagram and Snapchat remains fierce. Research suggests that top social media influencers prefer Instagram Stories to Snapchat Stories.
Snap’s core users belong to the Gen Z demographic, or those who were born between 1996-2010. About a quarter of the US population is Gen Z. As this generation grows older, will users be still attracted to the Snapchat app? Or would they possibly use it less?
And could there soon be a new social media app or platform for the incoming Gen Alpha that could even replace Snapchat?
SNAP’s Rollercoaster Price Ride
In 2014, Facebook wanted to acquire Snap for $3billion, but the group declined the offer. Then Snap had its stock market debut in March 2017 and reached a $19 billion valuation on its offering price.
Between the IPO and late Dec. 2018, SNAP investors did not have much reason to be pleased with the performance of stock. After an IPO price $17, and a subsequent high of almost $30, on Dec. 21, 2018, Snap shares hit an all-time low of $4.82.
At the time SNAP stock was regarded as a classic case of when being popular did not necessarily translate into being profitable. Despite the growth of the Snapchat app, many analysts were not entirely convinced that SNAP had a viable business model where it could monetize the app’s popularity.
In other words, Wall Street was asking whether every cool app should indeed become a publicly-traded company. The consensus in late December 2018 was that Snap’s IPO had been somewhat premature.
Then, 2019 marked the beginning of a stellar run up in SNAP share price. On July 26, the it saw a 52-week high of $18.36. The stock now trades around $15 per share.
Analysts credit the change in investor sentiment with the growth in Snap’s user base, in part thanks to a redesign of its Android app and the Discover offerings.
So Should Investors Buy SNAP Stock?
Now that Snap has reported Q3 earnings, the daily movement of its share price will mostly be based on macroeconomic news and the actions of big day traders who follow not only SNAPbut also other social media stocks such as FB and TWTR.
Snap is a growth and speculative stock. Following the release of Q3 results, SNAP fell by more than 5% the next day. Since then, it has recovered fully and quickly.
I expect SNAP stock to trade within a range in the rest of the year, most likely between $17.5 and $12.5 a share. I’d personally wait for the release of the next quarterly earnings before buying into the shares.
If Snap management cannot keep meeting the Street’s growth forecasts, then the owners of SNAP may become more concerned about its lack of profit, and the share price could easily drop fast.
Those who have benefited from Snap’s 2019 gains may also consider taking some money off the table as we look ahead to the next earnings report. Alternatively, they may consider hedging their positions with covered call or put spreads.
The two important points to remember are that the trend is an investor’s friend and that Snap is a volatile stock.
Finally, long-term SNAP stock investors may want to consider the possibility that the company could become a takeover target in the future.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
