Ahead of a forthcoming earnings report and amid the ongoing unicorn IPO-fest, Snapchat (SNAP on NYSE) has found itself back in the spotlight. Although Snap’s post-IPO trajectory has been everything but smooth, the company has found more solid footing after shares managed to appreciate by more than 118% during 2019 alone.
The company’s stock, which was initially offered at $27.09, has since been on the decline, beginning 2019 at its lowest point ever at $4.99 per share. However, in the few months since, Snap has experienced a blistering rally, more than doubling its price to $11.67 at the time of writing.
Image source: https://www.nyse.com/quote/XNYS:SNAP
Even so, the current rally may be more illusory than it seems, as the company’s core business model remains thoroughly in doubt in some corners of the tech world.
The concerns about Snap’s profitability are nothing new, with observers noting even during its IPO that the company stated in its S-1 filings that “we have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.” With such a strong vote of confidence from executives, it is little surprise that shares prices have been volatile at best.
In the time since its public offering, Snap has never once reported a profitable quarter, and it appears that the upcoming quarterly report will be no different. The consensus of analysts tracked by the Wall Street Journal is anticipating earnings of -$0.22 per share for the first quarter of fiscal 2019.
Still, Snap seems to have turned back, or at least stemmed, some of the more concerning trends that have impacted its profitability recently – namely, sagging user counts. With that in mind, it is fair to question how Snap prices will behave in 2019.
Will they continue to rally back to IPO levels, or is the current comeback just a short-lived blip for the app’s prevailing journey lower?
Snapping Back to the Upside
Snap has been among the best performing social media shares since the outset of the year, and part of this performance can be attributed to rising average revenue per user.
However, a deeper dive into the calculations behind average revenue per user highlights that this is nothing more than a deceptive indication of the company’s health. Despite recording $2.09 in revenue per user for the fourth quarter, the total number of users fell during the period, making it easier to inflate this figure.
More likely, the recent resurgence in prices is attributable to a different factor, primarily the traffic that Snap is driving for application installs. As we’ve seen in the case of other social ad platforms, Snap’s business growth is largely dependent on how attractive it is as a media buy. From this perspective, Snap has been steadily expanding its influence, despite the continued dominance exhibited by both Google and Facebook.
Data compiled by the AppsFlyer Performance Index, which tracks media sources’ share of the mobile app installation market, broadly confirms this viewpoint.
When it comes to Snap’s advertising platform’s ability to drive gaming app installs in North America during the second half of 2018, AppsFlyer’s data indicates that Snapchat’s market share rose by 25.0% compared to the first half of the year, reaching 4.5% of the total pie (when excluding Facebook and Google).
Image courtesy https://www.appsflyer.com/
When it comes to non-gaming application installs, however, Snap controls a whopping 32.2% of the North American market (again excluding for Facebook and Google, which maintain an overwhelmingly dominant presence), exhibiting 70.0% growth during the second half of 2018 versus the figures recorded during the first half of the year.
In Western Europe, Snap’s non-gaming application install traffic is also the most significant after Google and Facebook, accounting for an astounding 40.4% of the entire pie when excluding the two giants from the calculations.
Nevertheless, despite the 37.0% increase in Snap ARPU during the previous quarter, a shrinking userbase could be a factor that raises concern amongst the platform’s most fervent investors and once more emboldens short-sellers.
Are Shorts About to Reset?
The rapid rise in share prices has also notably coincided with falling short interest in Snapchat shares. According to figures from the Wall Street Journal, which compiles short interest data reported by exchanges, 13.99% of the company’s free float was sold short as of March 29th. Although still high, this figure is a marked 10.73% drop from the prior report’s figure, suggesting that shorts are lightening up ahead of the first quarter earnings report.
Yet, this fails to account for the demographic changes that Snap is experiencing in tandem with other social media giants. For Snap specifically, its demographic is aging, and with this aging, comes the likelihood of less frequent use, a development echoed by Facebook’s aging user-base. Although Snapchat has focused on improving its engagement, especially after introducing its own original content, the likelihood of this becoming a major draw for other social media users outside its traditional audience is optimistic at best.
Even in a scenario where Snapchat were to experience a major spike in user growth, the question remains as to whether the company will ever be profitable and stop losing money. True, driving app installs is a huge monetization opportunity, but for a company that has consistently failed to turn a profit and previously warned that it may never be profitable, the upside potential for shares is undoubtedly overshadowed by the downside risks.
Although Snapchat has managed to avoid many of the PR blunders related to safety, security, and data privacy that have embroiled rivals like Facebook, this alone is not enough to ensure a steady upwards stock price trajectory. New features designed to improve engagement may be useful for short-term bursts of user acquisition, but long-term, the company must explore a new strategy to not only heighten acquisition, but also reverse the demographic time bomb and limited popularity amongst older and younger smartphone users that threatens to obliterate its monetization potential.
Snapchat is reflective of many other social media platforms that intend to monetize their user data for the purposes of growing advertising and traffic revenues (akin to the app installs that Snap is currently driving), but ultimately, in the context of the big picture of the company, these add little value.
With no profits recorded since inception, and only the most bullish of analysts expecting positive earnings during 2021 at the earliest, the upside of Snap is highly unlikely to materialize near-term.
A Problem Solver, or Just Another Solution Without a Problem?
Ultimately, a would-be investor in Snap should simply consider one question: What problem does the company’s product solve? There are plenty of social media platforms, messaging applications, and other traffic drivers out there, but what is Snap’s actual strategy for competing in any one of these niches?
Until the company can deliver a clear vision for what its future will look like and how it will cater to changing demographics and those it has been unable to woo, the latest rally in shares appears more like a short-squeeze than a trend reversal. If anything, this week’s earnings announcement will be more reflective of another opportunity for short-sellers to reload amid expectations of a shrinking user base and less attractive prospects going forward.