SNAP Stock Illustrates the Danger of Free

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If you invested in Snapchat stock (NYSE:SNAP) on Jan. 2, 2019, you’ve had a good year. The SNAP stock price has grown 162% year-to-date. But if you look at the long-term trajectory, the stock is telling a different story.

SNAP Stock Illustrates the Danger of Free

Source: dennizn /

Since the company’s initial public offering (IPO) in March 2017, the stock has been on a downward trend. In fact, investors who have hung in with Snap stock since its IPO are now seeing their shares worth about 50% less than the IPO price.

What’s worse for Snapchat is that the company is not yet profitable. And in 2019, investors have made it clear they will not allow unprofitable stocks to get away with smoke and mirrors. They want to see a clear path to profit. In the case of SNAP, giving investors something to see has to mean something more than its augmented reality glasses, Spectacles 3, that had a tepid launch in November.

The problem for SNAP is finding a way to monetize its user base. Like all social media outlets, users can start a Snapchat account for free. The company makes money largely by selling advertising, which is why investors pay attention to metrics like daily average users (DAUs). And SNAP uses a self-serve ad platform which allows companies to purchase ads directly from Snapchat. The success of which has propelled the stock’s growth in 2019.

But I’ve always been skeptical of a model where the user has no skin in the game. And that’s why I question the wisdom in investing in Snapchat.

Snapchat Is Popular but Is That Enough?

About a month ago, I wrote an article in which I said I liked Snapchat as a company more than I liked Snapchat stock. The problem I had then is the same one that I have now. It’s a stock that appeals to a very specific target audience. For that reason, it should continue to retain a high level of DAUs.

But it’s also a stock that will be popular right up to the point that it’s not. In this way, I view Snapchat as less like Facebook (NASDAQ:FB) and more like Pinterest (NYSE:PINS). Both companies have a passionate user base, but they both have business models that are copied. In the case of Snapchat, they are already facing pressure from TikTok which, unlike Facebook, is taking direct aim at SNAP’s user base.

SNAP Stock Needs a Catalyst

One of the problems that SNAP stock faces is a catalyst for growth. It’s not enough for SNAP to have a large base of DAUs. The path to profitability for SNAP stock is to monetize that base. And on that front, the news is not clear.

Snapchat is delivering on the revenue front. SNAP reported quarterly revenue of $446.1 million. The company is forecasting revenue for the fourth quarter to come in between $550 million and $560 million. And SNAP is even expecting “positive adjusted EBITDA” that could be as high as $20 million.

But for all that good news — and it is good news — SNAP stock price has actually moved to the lower part of the tight range in which it was trading. This suggests to me that investors are seeing the problems for SNAP stock resulting from increasing competition and a valuation that makes their path to profit less clear.

The Bottom Line on Snapchat Stock

I am negative on SNAP stock for the simple reason that ultimately playing the DAU game has its limitations. And more importantly, free has its limitations. The internet is shifting towards security. And social media was not designed with security first. Plus, SNAP may be able to increase and maintain its user base, but I don’t see a path to monetizing that base.

It may seem like a simple explanation, but investing doesn’t have to be complicated. In the world of social media, companies are building a better mousetrap every day. And right now, Snapchat does not appear to have anything that makes it sticky in the long term.

As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.

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