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The Bull Case for Snap Stock Is Firming up, but a Big Red Flag Remains

Laura Hoy

Social media platform Snap Inc. (NASDAQ:SNAP) has had a turbulent ride since it’s debut on Wall Street two years ago. The platform’s unique ability to engage with younger generations has made it a popular topic among investors, but so far Snap stock looks unlikely to make it anywhere near its 2017 highs above $27. 

snap stock

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However, the tide appears to be turning for SNAP though, and the bull case is starting to look much more appealing. Snapchat stock is sitting on several big growth catalysts that could help the firm outshine its peers over the next few years if things go to plan.

Those fresh tailwinds make SNAP worth considering at $11.69 per share.

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Instagram Bows Out

Back in May, Facebook’s (NASDAQ:FB) Instagram decided to pull the plug on Direct, a new app that allowed users to send private messages to each other outside of Instagram. The new app was seen as direct competition for SNAP, so its end was a boon for Snapchat stock.

While the demise of Direct does mean that Snapchat will have one less competitor at the app store, it doesn’t give the firm a huge edge because Instagram isn’t giving up on direct messaging completely.

The company said it plans to consolidate the features that Direct offered inside Instagram’s own messaging platform. Investors still took the news as a positive for SNAP stock and sent the share price more than 7% higher. 

SNAP Revamp

SNAP’s latest Android app redesign is another big reason the bull case for Snapchat stock is strengthening. The firm recently released a new version of its platform for Android users that will likely bring daily active user numbers higher.

The firm was criticized for putting out a lackluster version of its app on the Android platform and the poor design resulted in a decline in user numbers. However, DAUs were on the rise according to the firm’s most recent quarterly results and that figure is likely to keep rising as Android users around the world are exposed to the most recent version of Snapchat.

New Features

The past year has been about investing in a better experience that will draw in new users and hold on to existing ones, and the result of that focus is about to come to fruition. In addition to SNAP’s latest gaming platform, the firm has also been working on expanding its music licensing deals in order to allow users to add licensed music to their Snapchat videos.

The move comes as TikTok, a lip-syncing video app, gains traction among younger generations. TikTok’s explosion was particularly threatening to SNAP as the two are vying for the attention of younger users, but Snapchat’s decision to integrate similar features is likely to help SNAP hold on to its users.

One Big But

There’s no denying that the bull case for SNAP stock is growing. It’s important, however, to keep in mind that it’s still an extremely risky buy. For one thing, SNAP stock’s price is still relatively expensive for what you’re getting. SNAP isn’t turning a profit yet, and the firm’s cash is tighter than I’d like, especially since it trades at 12 times its sales. 

On top of that, SNAP doesn’t exactly have a track record of being investor-friendly. For an average investor, the firm’s shares hold no voting power and management’s decision to forgo an annual shareholder meeting sent a worrying message about SNAP’s regard for its investors.

Finally, in order to get behind the SNAP stock bull case, you have to trust Snapchat’s management, something I struggle with. Not only was I thrown off by their unexplained decision to label the firm as a “camera” company, but rumors about corporate culture and a shrouded roadmap for the future of the company became even more believable when the firm decided against an in-person shareholders meeting.

If you’re buying SNAP stock you’re taking a risk to follow a management team that doesn’t have a history of being transparent. 

The Bottom Line on Snap Stock

SNAP stock is starting to look a little bit more enticing. The firm’s focus on improving the user experience has been a major boon for user numbers, and that trend is likely to continue in the quarters to come.

However, SNAP still looks a little too expensive for the risk it carries and I’m dubious about where the firm is headed under its current leadership. For that reason, investors looking to take a position now should be cautious and ready to stomach the risk involved. 

As of this writing, Laura Hoy was long FB.

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