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3 Reasons Snap Stock Will Continue to Weaken

Tom Taulli

One of the many criticisms of Snap (NYSE:SNAP) stock is that it went public too soon. Critics say that management should have waited a couple more years before launching an IPO of SNAP stock, in order to allow the company’s operations to mature first.

But I think that criticism is actually off-base. If the IPO of SNAP stock was today, do you think it would attract much interest?

Probably not. Actually, the timing of the IPO of SNAP stock, which took place in March 2017, was spot on. The company was able to raise a hefty $3.4 billion, which has proven critical. Additionally, its successful IPO gave it a great deal of exposure.

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But of course, the problem is that SNAP’s management has not capitalized on the IPO, resulting in major losses for owners of SNAP stock.

Can management turn things around? Or should investors avoid Snapchat stock for now?

The company still faces major risks and its strategy is far from clear. Let’s take a look at its most important attributes.

User Growth

When it comes to social media platforms, the all-important metric is user growth. Unfortunately, Snap has been falling short in this area.

In the third quarter, its Daily Active Users (DAUs) fell 1% to 188 million. the second consecutive quarter in which its DAUs declined. Snap has indicated that it expects its DAUs to fall again in Q4.

A key reason for Snap’s languishing user base is the devastating impact of the success of its rival, Facebook (NASDAQ:FB). For the past couple of years, FB’s Instagram website has copied Snap’s successful features like Stories, causing Snap’s growth to decelerate.

It looks like FB is using the same playbook with WhatsApp. And given the latter app’s international footprint, Snap could find it difficult to grow in foreign markets. Note that WhatsApp has 1.5 billion active users.


Leadership

There hasn’t been much stability in Snap’s executive suite. In 2018, six of the company’s executives bolted. Nick Bell (the head of content), Imran Kahn (the chief strategist), Tom Conrad (vice president of product), and Drew Vollero (the finance chief) were among the executives who left SNAP this year.

In the past, Twitter’s (NYSE:TWTR) innovation was hurt by the large number of executives who left the company. And it looks like the same thing is happening to Snap.

For example, SNAP has had problems with its Android app, which has been a significant impediment to its growth (especially in international markets). Snap’s smartglasses, called Spectacles, have also been a flop.

Moreover, Snap has been too focused on young people. In other words, the company has done little to appeal to other age groups.

The Valuation of SNAP Stock

Even after the steep drop of Snapchat stock, it’s still far from cheap. The price-sales ratio of SNAP stock is six. That does look a bit pricey, given its intense competition and falling user base.

The company is also continuing to burn cash (it’s burned $1.5 billion in less than two years). So if SNAP’s user base continues to fall, which seems likely, Snap may have little choice but to raise money again, which will likely weigh on SNAP stock price.

Finally, it can be extremely difficult for consumer Internet apps to regain momentum. Look at the flameouts like Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN). Even worse, social networking websites can also quickly evaporate, a la MySpace.

I don’t want to imply that Snap will suffer a similar fate. But there are few catalysts that can get Snapchat stock back on track.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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