Snap Inc. (SNAP 2.89%) has been one the most talked-about tech IPOs of this year -- but that hasn't necessarily been a great thing. The company has faced rumors of dwindling advertiser interest, has felt lots of competitive pressure from Facebook's (META -10.56%) Instagram, and has seen its stock price plummet about 40% since it went public.
But perhaps all of that bad news isn't enough to keep you away from being enticed by Snap and it's trendy Snapchat app. If you're considering buying shares of Snap, or adding to your position, then let me at least go through three reasons you shouldn't be considering a Snap investment right now.
Image source: Getty Images.
It's popular with coveted age groups
One of the biggest things that's lured investors to Snap is that the company's Snapchat app is that it's very popular with millennials and younger users. For example, an eMarketer report published a few months ago that Snapchat is outpacing Instagram users in the 12-to-17 and 18-to-24 age groups. That's notable, because these age categories are typically the ones advertisers covet.
But Snap has faced a few problems with this. The first is that even though Snap did manage to grow its top line by 153% year over year in the second quarter, only 7% of advertisers have placed ads on Snapchat -- and there are rumors that some advertisers are already losing interest in the platform.
Some advertisers told CNBC back in August that "[i]nterest among brands is flat -- at best -- or declining," for a number of reasons, including things like a lack of measurement data for brands and confusion about the platform.
Worse yet, the article revealed that many of those advertisers appear to be flocking to Snapchat rival Instagram. And why wouldn't they? Instagram is both wildly popular and an established and stable platform. (More on that later.)
Another problem for Snap is the daily active users (DAUs) in its flagship app. Snapchat DAUs grew by a good -- but not great -- 21% year over year in the second water, but only by a meager 4% sequentially. Snap should be growing its DAUs at a much faster rate that this stage, considering how young the company is.
Snap may be popular with younger users, but it's still too early to tell if the company can consistently grow that user base and use it draw in -- and keep -- advertisers to its platform.
It's unique
If you've ever used the Snapchat app then you'll know that it doesn't look like other social-media and messaging apps. But Snapchat's seemingly unique appearance and features have proved very easy to copy.
About a year ago, Instagram launched its Stories feature, which is essentially a clone of Snapchat, and since then it's blown past Snapchat's users. Snapchat had 173 million DAUs at the end of its second quarter, meanwhile Instagram Stories has already surpassed 200 million users.
Instagram has kept the pressure coming as well. The photo and video sharing app has added other similar Snapchat features, including location filters, augmented reality stickers, and the ability to create your own stickers.
This is bad news for Snap because it means the company will need to continue coming up with new features, and fast, to stay ahead of Instagram. And even when it does, it's likely that its rival will just copy those as well.
An analyst just said positive things about Snap
Some investors got really excited about Snap at the beginning of October and pushed its share price up by more than 11% in one day. The optimism came after Credit Suisse analyst Stephen Ju increased his price target to $20 from $17 and forecast higher North American user growth than he previously expected.
There's nothing wrong with keeping tabs on what analysts are saying about a stock, but an 11% share price rally means that investors are buying in too closely to one analyst's optimism. And the reason that's dangerous is that it's enough to find another analyst that's just as bearish on the stock as the other is bullish.
For example, just a week after the Credit Suisse note, a separate BTIG Research admitted that it should have started Snap with a "sell" rating when the firm began its Snap coverage back in April.
"With the stock down 28% in the past six months since our initiation at Neutral, we were wrong to not have a sell rating," BTIG Research analyst Rich Greenfield wrote.
Following the whims of one analyst is likely to steer you wrong when picking your investments. It's better to dive into the stock yourself and find out what's really going with the company instead, and make an informed decision based on that.
The bottom line
Snap may eventually turn into smart long-term investment, but as it stands right now, the company still has a lot to prove. You may have a better Snap investment thesis than the ideas mentioned here, but I think investors should be cautious. Snap needs to prove that it can consistently attract and keep advertisers, it needs much more use growth, and -- most importantly -- it needs to show that it can out-innovate and outpace Instagram. Until it can do all three consistently, I'd stay away.
