3 Reasons Why the Mega Rally of Snap Stock May Be Over

Stocks to sell

Among the social media operators, Snap (NYSE:SNAP) stock was one of the standouts in the last year.  In the last 12 months, Snapchat stock has surged by a sizzling 170%, putting its market cap at $23.5 billion.

With Snap Stock, Valuation Matters More Than Growth… and for Good Reason

Source: dennizn / Shutterstock.com

But it’s important to keep things in perspective. The company went public in March 2017 at an offering price of $17. Fast forward to today: SNAP stock price is $16.65!

Along with last year’s poor performances of Uber(NYSE:UBER) and Lyft(NASDAQ:LYFT), Snapchat stock is a cautionary tale about investing in red-hot tech stocks.

But SNAP stock also highlights the fickleness of the social media market.  There are many once-popular platforms that have since flamed out, like MySpace.

Granted, the rally of Snapchat stock occurred because of some encouraging news about the company. Its major app redesign – which started a couple of years ago – led to strong rebounds in its user base and revenue. Snapchat has also added new features, including filters, original content, and a self-serve ad system.

Will the momentum of Snapchat stock continue or could SNAP stock retreat soon? For the most part, I think  investors should be cautious about SNAP stock because the company still faces some tough challenges and risks.

Valuation

The valuation of Snapchat stock is definitely high. Consider that the price-sales ratio of SNAP stock is 15. By comparison, Facebook (NASDAQ:FB) has a P/S ratio of nine and Twitter’s (NYSE:TWTR) is seven. In other words, when it comes to Snapchat stock, investors have high expectations.

Meanwhile, investors’ view of tech stocks, particularly early-stage tech stocks,  is dicey. Not long ago, there was a selloff  of tech stocks because of the implosion of WeWork. So other startups may suffer similar fates

Besides, with the upcoming election and growing geopolitical uncertainty, it seems likely we’ll see more volatility in 2020. And all of this will probably weight on riskier companies like Snap.

Competition

Of course, FB has copied quite a few of Snap’s features. FB’s  Instagram platform, which has 1 billion users, has benefited from those knock-offs. While Snap has been able to withstand Facebook’s copying, the competitive threat posed by FB, which has hurt SNAP in the past,  is still an issue for the owners of Snapchat stock.

But there is another social app to worry about: TikTok, a spinoff of China-based ByteDance which has been a huge success. The app enables users to create engaging, short videos that use technologies like AR (Augmented Reality).

Research by Morning Consult shows the surging popularity of TikTok. About 42% of Americans between the ages of 13 and 16 in the U.S. use the app, versus 68% for Snapchat.

TikTok’s engagement is also quite high. Users in the U.S. open TikTok an average of eight times a day and spend 46 minutes on it, according to a leaked company presentation.

If the app’s momentum continues, it is likely to become a serious problem for SnapChat, hurting SNAP’s user acquisition and monetization efforts.

Demographics

It’s true that Snapchat’s large group of Gen Z users is valuable, since Gen Z is a tough group to attract, and members of the generation are at an age in in which early brand loyalty is often created.

But the problem for Snapchat stock is that the company has not done much to attract users outside of Gen Z. SNAP is really a one-trick pony.Moreover,  as SNAP’s users get older, they could transition to another service.

Finally, Snapchat’s success has not translated too well in foreign markets. Consider that 46.5% of its users are in the U.S., with France accounting for 9.7% of its users and India contributing 9%. InvestorPlace.com columnist Josh Enomoto wrote: “With this lack of diversity, it’s hard to believe in its growth narrative. Clearly, the rest of the world doesn’t view the platform as useful or attractive. Logically, this is a huge dilemma for Snapchat stock.”

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow 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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