It has been a few weeks since the Snap Inc (NYSE:SNAP) IPO, but the company’s long-term prospects remains one of the most hotly debated stocks of 2017. Recent analysis from large Wall Street firms all declared that Snap’s stock is either a “Buy” or “Hold”, but others have pointed that those firms were the same ones who had underwritten Snap’s stock earlier this year. The Snap stock itself has been sent bouncing up and down at seemingly any provocation, sitting at around $22 at the time of this writing.
Instead of flat out declaring whether Snap is worth buying, holding, or selling, a better approach right now is to look at current short-term events and discuss what they mean for Snap’s long-term future. From Snap’s ongoing efforts to monetize its base to competition from Facebook (NASDAQ:FB), there are some good news for Snap’s prospects. But there are some concerning implications which could hurt its ability to become profitable in the long run.
Will Facebook kill Snapchat? (Not Exactly)
The latest event which sent Snap’s stock stumbling was Facebook’s announcement that it would also be including temporary photos and messages in a feature called Facebook Stories, a blatant rip-off of Snapchat Stories. Temporary photos have long been viewed as Snap’s key distinction from other social media websites. By including that option, Facebook and Instagram are trying to co-opt Snapchat and drive out a competitor.
Competition by Facebook is a serious concern for Snap’s future prospects, but investors should take care not to overblow this announcement. Facebook and Snapchat exist for entirely different social media purposes. Facebook is the place where you go to post carefully edited photos to every one of you and your beloved ones having a good time. Snapchat is the place where you show your friends pictures of your activities on Saturday night. That difference is just as much about branding as it is about technology, which limits Facebook’s attempts to blunt Snapchat.
In fact, Facebook’s attempts to copy Snapchat could be construed as good news, as it shows that Snapchat has been successful enough to warrant imitators.
User Growth and Monetization
Facebook’s attempts to co-opt Snapchat will not succeed in pulling current Snapchat users into its orbit. But what it could do is encourage people who have a Facebook account but not a Snapchat account to stay with Facebook to tell their story, which brings us to one big problem surrounding Snapchat.
In the lead-up to the Snap IPO, multiple investors expressed their concerns about Snap’s staggering and increasing net losses. This concern was further exacerbated by the fact that Snap’s user growth rate appears to be declining, fueling fears that Snap could become the next Twitter and stuck as an unprofitable company with minimal growth prospects.
Some investors point out that Snapchat is far less monetized per user compared to Facebook or Twitter. Investment banking firm Stifel in its rating of Snap as a “Hold” noted that “As of 4Q:16, Snap monetized its growing U.S. user base at $6.66 per user per year compared to Twitter at $50.18 and Facebook at $80.79.” Investors look at Snapchat’s popularity with millennials and fantasize about the possibility of Snapchat making oodles of money by advertising to that demographic.
While it is true that Snapchat can improve its ability to monetize its current consumer base, I remain skeptical about how much it can do. Millennials have been a coveted demographic in part because they are unwilling to accept advertising, and I am not convinced Snapchat will easily figure out that problem. There are limits to how much Snap can ramp up advertising before millennials will leave for another social media website – especially to a competitor who is building something very similar to Snapchat.
Be Highly Skeptical
Snap’s ability to monetize its base and competition from places like Facebook are far from the only problems surrounding this company. Investors should be concerned about Snap’s corporate governance structure where it has sold exclusively non-voting shares, the decision by Snapchat’s founders to promptly cash out the minute the IPO began, and the fact that banks who took Snap public are far more positive about Snap compared to other investors.
Potential investors need to understand that there are a lot of concerns which surround this company. Can Evan Spiegel make the hard decisions when Snap inevitably slows down? Can Snap successfully monetize its user base and keep user growth high, even with increasing competition from other social media companies? Can it become profitable within the next few years?
Even Snap’s backers admit that the company will not be profitable until 2019, and there are a lot of ways in which this company could stumble until then. Investors who already hold Snap stock and can sell might as well wait until Snap produces more concrete results in a few months to reach a decision. But for everyone else, the safest course is to stay away and look for a more appealing tech company.