2019 was a break-out year for Snap (NYSE:SNAP), but 2020 looks unlikely to live up to the hype. Snapchat stock was helped last year by the firm’s Android app re-design, which helped it add 20 million new daily active users during the first three quarters of the year. Fourth-quarter daily active users (DAUs) are expected to add another 4 million to 5 million to that figure.
But excitement over SNAP’s turnaround is starting to look played-out, as the firm’s 2020 growth opportunities appear to be priced in already.
Snapchat Stock Is Overvalued
SNAP stock was able to make its way 65% higher over the course of 2019, but 2020 looks decidedly more mellow for the “camera company.” That rally was certainly earned when when you look at the firm’s user growth, revenue growth, and expanding margins throughout the year.
However, now Snapchat sports a price-to-sales ratio of 16 — a sizable premium compared to its peers. To put that into perspective, Facebook (NASDAQ:FB)’s P/S ratio is just 9.5 and the S&P 500 has a P/S ratio of 2.4.
That suggests that any good news coming up in 2020 has already been priced in. It also adds an additional layer of risk as expectations for the social media site have become dangerously high. Any missteps or unexpected declines and Snapchat’s rally could come tumbling down.
Harder Comparisons in 2020
One of the biggest reasons long-term investors might want to stay on the sidelines with SNAP stock is the fact that the firm is entering a tough year for earnings results. While the firm seems to have cracked the code as far as user growth, it’s worth noting that 2019 offered easy comparisons that made its comeback look even better.
Moving into the second half of 2020, Snapchat’s comparisons are going to get harder. That means disappointment is likely unless the firm can continue raising the bar. In 2019 Snapchat posted record-breaking Q2 results, which means 2020’s Q2 will likely pale in comparison.
Uneven User Growth
Another issue that could crop up for Snapchat this year is user growth in North America. During the third quarter, Snapchat’s DAUs rose by 13%. Broken down geographically though, that growth looks uneven. In North America, user growth was just 6% — most of the firm’s growth came from overseas.
The reason that’s troubling is because although Snapchat grew its average revenue per user by 33%, most of that came from North American users. Monetization overseas has been relatively low for Snapchat. For now, growth in North America looks like it’s starting to plateau. The firm will have to start leveraging the international user growth it’s seen in order to continue adding revenue.
Competition Worries
The other big factor investors should consider is competition. Snapchat is far from the only social media platform out there. There was a time that Snapchat was the hot new platform destined to take the cool kids away from Facebook and Instagram. But that time has come and gone, as video sharing app Tik Tok appeals to the younger generation.
Snapchat is stuck in a rut, with millennials paying attention — but that’s about it. The firm will need to expand its appeal as Facebook did. The OG of the social media space started out as a platform just for college students, but has since become the preferred sharing network across a wide range of demographics. Can Snapchat do the same?
I believe that’s unlikely. The older generations have already settled on Facebook, and Tik Tok has captured Generation Z. For everyone in between, there’s Instagram — which has been shamelessly copying Snapchat since it went live.
The Bottom Line
Snapchat certainly has its benefits — the firm is likely to benefit from tailwinds in digital ad spending, the platform has been diversifying its offerings to attract new users and the stock has seen several ratings upgrades over the past week Analysts at Cowen raised their price target to $20, pointing to increased spending among advertisers on Snapchat campaigns.
Analysts at Jefferies also raised their forecast, giving Snapchat stock a “buy” rating and a $21 price target. The firm is optimistic about international user growth, but it’s worth noting that Jefferies analyst Brent Thill told Bloomberg that Facebook is still his number one pick in the social media space.
As of this writing, Laura Hoy was long FB.
