It's been a resurgent year for Snap Inc (NYSE:SNAP), the parent company of Snapchat. The company had been on a downward spiral since its initial public offering (IPO) in March of 2017, largely due to concerns over its lackluster user growth. But year to date, the company's stock is up by about 140% (as of this writing), and Snap's most recent earnings reports show a renewed interest in the company's platform.
Despite this rather pleasant and surprising turn of events, now may not be the right time to buy Snap's stock just yet. There's a major reason why it's best to take a wait-and-see approach.
How Snap staged a comeback
It's worth considering how Snap managed to turn things around. Simply put, Snap rolled out several new features and decided to go back to its roots by appealing primarily to younger demographics.
These efforts promise to play a key role in the company's future, too. As Snap's CEO Evan Spiegel said during the company's second-quarter earnings call, "Now that we have built a strong underlying foundation for our service, we are well-positioned to continue investing in key areas like our content platform, our augmented reality platform, and our gaming platform."
If the recent past is any indication, Snap could keep on delivering strong results with this strategy. During the second quarter, the company recorded revenues of $388 million -- which represented 48% year-over-year growth -- and soundly beat consensus analyst estimates. The company also added 13 million daily active users, and its retention rate is on the rise. In short, Snap seems to have finally stumbled upon a business model that's conducive to positive results.
Still netting massive losses
Now let's address the elephant in the room: Snap may be heading in the right direction but its bottom line still shows red ink. During the second quarter, Snap posted a net loss of about $255 million. To be fair, the company's bottom line increased both sequentially and year over year.
Further, net losses aren't necessarily an indication that a particular company is a poor investment option. Major tech corporations such as Shopify and Square are also unprofitable, yet many consider them to be attractive stocks.
However, while both Shopify and Square have managed to carve out a particular niche in a competitive market for themselves -- a niche in which they've become industry leaders -- Snap has to contend with competition from much bigger platforms. Facebook (NASDAQ:FB) is one of the social media giants Snap is going up against and it often duplicates, clones, or otherwise copies some of Snap's features.
Instagram, which is owned by Facebook, famously rolled out its version of Snap's stories back in 2016, a feature that now boasts hundreds of millions of active users on the photo-sharing application. This sort of copycat action risks slowing down Snap's progress, and along with other threats, will continue to present headwinds for the company.
Here's the challenge for Snap. First, the company has to continue delivering strong user growth and engagement with new and existing features, even though most of them can be easily hijacked by other (and often larger) platforms. Second, the company has to deliver enough growth across the board to eventually turn a significant net loss into a profit. Third, Snap has to remain consistently profitable in this hyper-competitive environment.
Can the company pull it off? Probably, but its recent and somewhat short-lived success is hardly a conclusive argument, especially when there are other tech stocks that possess much better prospects.