You might have heard by now that Microsoft (NASDAQ:MSFT) is considering acquiring the U.S., Canada, Australia and New Zealand operations of TikTok, the Chinese social media company and app. Since the TikTok app competes against the similar Snapchat app, some investors are worried about Snap (NYSE:SNAP) and might be tempted to sell Snap stock.
Dumping your Snap shares could be a mistake, however. If anything, the recent dip in the Snap stock price presents a prime buying opportunity. The Snap share price fell 5.4% on the day that Microsoft revealed its interest in TikTok.
Therefore, if you’ve been considering purchasing Snap stock but thought it was overpriced, you now have a chance to own the stock at a discount. And the concerns about competition from Microsoft and TikTok are, in all likelihood, overblown.
A Closer Look at Snap Stock
In February of this year, prior to the onset of the novel coronavirus, Snap stock was riding high at the $19 level. At that time, it seemed as if the greatest concern was breaking through the $20 resistance level established in 2018.
Then the coronavirus came to America and crashed the stock market. With that event, Snap stock soon fell to its 52-week low of $7.89. Yet, that heavily discounted price wouldn’t last long.
Due to shelter-in-place mandates, many people stayed at home and the Snapchat app kept some bored people occupied. This was undoubtedly a contributing factor to the recovery in Snap stock. And it was a powerful recovery as the stock reached a 52-week high of $26.76 in early July.
By Aug. 21, Snap stock had retraced to $21.60, demonstrating that the war between the bulls and bears hadn’t been settled yet. The bulls will want to retake the $26 level and eventually $30 on strong trading volume, if possible, before the year is over.
The TikTok Threat
For a brief time, the headline news was that the TikTok app might cease to exist in the United States. President Donald Trump’s threat to ban TikTok came with a condition that a U.S. company needs to buy TikTok’s U.S. business by the middle of September.
Not long after the president issued this ultimatum, Microsoft revealed that it was eyeing the TikTok app and market participants celebrated this by bidding up the Microsoft share price.
So evidently, the market interpreted this event as a net positive for Microsoft and a blow to Snap. After all, TikTok is a popular and lucrative app, as I explained in a previous article on Microsoft:
“During the peak of the novel-coronavirus crisis, when young folks were bored at home and seeking diversions, TikTok crossed the threshold of 2 billion downloads. It was downloaded 315 million times just during the first quarter. Moreover, lifetime user spending for TikTok reached $456.7 million during that time.”
Snap Strikes Back
However, it’s unreasonable to assume that Snap is just going to let TikTok and/or Microsoft usurp its market share among Generation Z and millennial social-media users.
First of all, we need to understand what makes TikTok so popular with this demographic of users. TikTok is dominated by very brief videos featuring short skits, dances, and lip-synching.
In fact, some of the most popular videos on TikTok show nothing more than a young person dancing and/or lip-synching to a popular song. As a YouTuber myself, I find this trend baffling, but it is what it is.
Snapchat will soon mimic TikTok as Snap is rolling out a feature in which Snapchat users will be able to set their “Snaps” to music. The music can be added either pre or post-capture. And, the company claims to have a “robust” catalog of music.
This is a smart response to the TikTok threat. With the music-feature rollout, people who already have Snapchat on their smartphones won’t be as tempted to switch to TikTok.
It will be interesting to see how the Snapchat-TikTok battle plays out. However, at least we can see that Snap is fighting back.
The Bottom Line
Investors in Snap stock shouldn’t be excessively concerned about the TikTok threat. Even if Microsoft takes a stake in TikTok, Snapchat should remain popular as Snap is demonstrating its willingness to adapt to young users’ preferences.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.