There is no shortage of questions when it comes to Snap Inc (NASDAQ:SNAP).
The company famous for its social media app, “Snapchat,” has been stuck in a whirlwind run since its IPO in March. The trajectory of Snap has begun to draw comparisons to both Facebook Inc (NASDAQ:FB) and Twitter Inc (NASDAQ:TWTR).
The ultimate question, though, is whether Snap will mirror the Facebook stock price or the Twitter stock price.
The comparison boils down to the longevity of the company and how it will carve out its space in the social media market. And this is no arbitrary thought experiment. Whether you believe SNAP stock resembles more FB stock or TWTR stock, how the company’s growth compares to these two social media forebearers will have a massive impact on the fate of the share prices.
The Snapchat IPO was a wild ride for the company; the opening price was $17.00, which quickly rose by 41.2% once trading began, closing on its first day above $24.00 per share. Since that intense first 24 hours, the company has seen its price dip and level off. The company is now down over 15% since that first day of trading.
After such a volatile start, analysts are divided into two main camps: those who believe in the potential of Snap (Facebook comparison), and those who believe that the company isn’t all it’s cracked up to be (Twitter).
Snapchat IPO Fallout
One of the youngest billionaires in the world, Snap CEO and co-founder Evan Spiegel had a great day back in March, when Snap went public. In fact, the Evan Spiegel net worth shot up to nearly $6.0 billion following the single-day action.
But don’t let his massive wealth gain belie the fact that Snap has since had a tough time on the market. But that is by no means uncharacteristic of tech IPOs. Both the Facebook stock price and the Twitter stock price had strong gains in the early days of their lives on the public markets, followed by declines. The main difference being that Facebook righted its ship, while Twitter never quite did. This puts Snap in a precarious position.
(Data source: “Number of daily active Snapchat users from 1st quarter 2014 to 4th quarter 2016 (in millions),” Statista, last accessesed April 19, 2017.)
First, let’s take the current path that Snapchat finds itself on, and see how Snap will be affected. With the latest leaked numbers putting Snap’s daily active users at around 150 million, the potential is there for huge advertising revenue and, if growth holds up, bigger payoffs down the line. A sustainable attraction of new users is the lifeblood of any social media company. (Source: “We’re about to learn everything we’ve wanted to know about tech’s most secretive company,” Business Insider, February 2, 2017.)
And Twitter is a great example of what happens when that model goes wrong.
Twitter had a lot of hype surrounding its IPO; initial gains, strong growth, everything was great, then…boom. Growth slowed, features didn’t pan out, and the company found itself floundering, leading to a 62% decrease in share value since it went public.
Twitter has become something of a horror story among social media companies, with the Twitter stock price being a poignant reminder of what happens when reality doesn’t live up to potential and your numbers begin to stagnate.
Besides the possible future dangers in terms of the numbers tapering off, there’s a very real threat that Snap will have to face: monetization.
We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.
No, that isn’t some quote from a doomsayer analyst. That’s from Snap’s own S-1 filings. (Source: “FORM S-1,” U.S. Securities and Exchange Commission, February 2, 2017.)
Hardly the type of stuff that inspires confidence among investors. Which brings us to the ultimate danger facing Snap: that it will, much like Twitter, suffer a slow death of a thousand cuts due to competition, lack of innovation, and no foreseeable path to profitability. Not to mention that the company has been known to burn through cash, losing $514.6 million in 2016, though the company did register revenues of $404.4 million in 2016, up a long way from $58.6 million in 2015. (Source: Ibid.)
And competition is indeed heating up. While we’ll later examine the upside of Snap and how that relates to Facebook, the two companies are linked in a much more adversarial relationship at the moment.
Years ago, Mark Zuckerberg and Facebook saw the potential in Snapchat and wanted to add the company to Facebook’s growing list of social media acquisitions (with Instagram being one of the tech giant’s savvier plays). Zuckerberg offered $3.0 billion for the company, but Snap’s leadership held fast.
And this was the right move, financially at least, for them. After all, Evan Spiegel’s net worth is nearly double that now. But in the long-term, Snapchat may have bitten off more than it can chew. (Source: “Snapchat’s twenty-something founders are each worth ~$4 billion — more than Facebook offered to buy their whole company 4 years ago,” Business Insider, March 2, 2017.)
(Data source: “Number of daily active Facebook users worldwide as of 4th quarter 2016 (in millions),” Statista, last accessesed April 19, 2017.)
With the number of Facebook daily active users at just under 1.23 billion, Facebook has not stopped in its efforts to court Snapchat, or rather, court Snapchat’s users. “Instagram” has copied many of the features you can find in Snapchat, and with the backing and nearly limitless resources of Facebook behind it, there’s a good chance that the company could simply outlast Snap.
This type of competition is the last thing Snap needs, especially as it finds itself fixated on growth and will have difficulty penetrating the advertising market which is already heavily dominated by Facebook.
There are numerous dangers threatening Snap from all sides. And analysts are concerned that if it doesn’t buck it, its shares could find themselves in a similar state as the Twitter stock price.
Can Snap Succeed?
We have all the negatives of Snap stock pretty thoroughly hashed out—what about the positives?
There are quite a few reasons that investors could still find themselves bullish on the company.
For instance, 45% of Snapchat’s adult users are between 18 and 24, an extremely lucrative demographic when seeking advertisers and also one of the best shares of that group in the entire industry. (Source: “Instagram’s Snapchat replica begins monetizing,” Business Insider, January 12, 2017.)
Add that to its fast growing daily active user base of 150 million strong, and there’s a good chance that the company could see itself thrive for years to come.
It also has a strong video component, which is a big boon to social media companies. Advertisers are more likely to shell out bigger dollars for the ability to engage in video-based ads. Just look at your Facebook feed for proof that video has taken over. Snap stock benefits from being a primarily video focused platform.
All these positive qualities have led some to believe that the company has what it takes to follow more in the mold of the Facebook stock price instead of lesser companies. As you can see below, the monthly active user rate has stagnated for Twitter, while Facebook continues to balloon well into the billions, which exemplifies both the success of FB and the failings of TWTR.
(Data source: “Number of monthly active Twitter users worldwide from 1st quarter 2010 to 4th quarter 2016 (in millions),” Statista, last accessesed April 19, 2017.)
(Data source: “Number of monthly active Facebook users worldwide as of 4th quarter 2016 (in millions),” op cit.)
Others put the strength of the company in its innovation, believing a company that is constantly on the lookout to better itself will naturally outpace a company like Twitter, which is mired in technological stagnation.
“We generate revenue primarily through advertising,” wrote Snap in its IPO filing. “We help our advertising partners generate a return on their investment by creating engaging advertising products that reach our large and desirable audience.” (Source: U.S. Securities and Exchange Commission, op cit.)
The company knows where its bread is buttered and has some solid foundations to back it up on the open market. But does that mean it’s a good investment?
Should You Consider Snap Stock?
To be blunt, I see more Twitter in Snap than I do Facebook.
Facebook totally revolutionized the way we communicate, find friends, and share moments of our lives with those closest to us. Twitter, on the other hand, was just an additional way to communicate in social media. Novel, absolutely, but hardly revolutionary. That’s why Twitter stock is flagging.
And that’s how I view Snap: novel, but not revolutionary. And if you look at the top performers in the tech market today, they were and are revolutionary companies.
Snapchat is a fun app that kids love and will likely continue to drive Snap stock for the next little while. But Snap itself sees the writing on the wall. It’s why it’s come to describe itself as a “camera company” instead of a social media company, despite only producing one set of poor-selling cameras that are embedded in glasses; Snap’s “Spectacles.”
At the end of the day, Snap stock in 2017 will have some good runs and rough patches. But in the long-term, this is not a winning stock.
The amount of competition is high, its financials are not in any kind of order that instills confidence, and its ability to innovate has yet to really be proven. The company has created a great app that millions of people love to use every day, but its secret sauce, so to speak, isn’t all that secret. Instagram and others will continue to challenge the company and I don’t see how it will weather that storm.
If you’re looking for a repeat of the Facebook stock price trajectory, you’d best look somewhere else, because you won’t find it in Snap.