Snap's (SNAP 0.47%) stock has tumbled about 70% this year and currently trades nearly 20% below its initial public offering price of $17. The social media company lost its luster amid concerns about its slowing growth, widening losses, and Snapchat's ability to adapt to Apple's (AAPL 0.83%) iOS changes.
Rising interest rates exacerbated that pain by driving investors away from unprofitable growth stocks, and Snap's abrupt decision to slash its second-quarter guidance in late May -- just one month after posting its original downbeat guidance with its first-quarter report -- spooked investors.
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Nevertheless, the bulls will point out that Snapchat's daily active users (DAUs) and average revenue per user (ARPU) continue to climb, and that it could lock in more users with its expanding ecosystem of short videos and augmented reality (AR) features.
They'll also claim its stock is cheap at four times this year's sales, since analysts still expect its revenue to rise 25% this year and grow another 35% in 2023. Three other recent developments -- which can be considered green flags for Snap's future -- might support that thesis.
1. A potential ban on TikTok
Piper Sandler's latest Taking Stock with Teens survey revealed a troubling new problem for Snap. For the first time ever, ByteDance's TikTok overtook Snapchat as the top social media platform for U.S. teens.
In the semiannual survey, 33% of respondents chose TikTok in the spring (compared to 30% in the fall) while Snapchat's share declined from 35% to 31%. Meta Platforms' (META 1.06%) Instagram stayed in third place with a 22% share during both periods.
TikTok had 1.6 billion monthly active users at the end of March, according to Data.ai, making it one of the world's largest social media platforms alongside Meta's Facebook and Instagram. Snap has tried to counter TikTok with a similar short video platform called Spotlight, but it's struggled to attract top creators even after subsidizing its videos with cash prizes. Meta has also been playing catch-up with Facebook Watch and Instagram Reels.
That's why a ban on TikTok would be a huge catalyst for Snap and Meta. The Trump Administration previously tried to ban TikTok over its Chinese ownership and alleged ties to the Chinese government, but the Biden Administration rescinded that executive order last June.
However, Federal Communications Commission (FCC) head Brendan Carr recently sent letters to Apple and Alphabet's Google to demand the removal of TikTok from their app stores, calling it "sheep's clothing" for a service that "harvests swaths of sensitive data that new reports show are being accessed in Beijing." It's unclear if the FCC will force Apple and Google to comply, but the removal of TikTok's app could send Snap's stock soaring.
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Key Data Points
2. The launch of Snapchat Plus
Snap recently started rolling out Snapchat Plus, a subscription service that lets subscribers customize the style of the app's icon, see who rewatched their stories, and categorize other Snapchat users as "BFFs" for $3.99 a month. Other features could also be added to the service in the future.
In a recent interview with the website The Verge, Snap's senior vice president for product Jacob Andreou said Snapchat Plus would target "the people who spend most of their time communicating with their closest friends on Snap." However, he dismissed the possibility of an ad-free tier, and said Snapchat Plus wouldn't become a "material" new source of fresh revenue anytime soon.
Nonetheless, Snapchat Plus still sets up the foundation for the addition of other subscription-based perks across its videos, games, and AR lenses. Those new features could widen its moat and lock in its higher-value users.
3. The "super app" plan starts to emerge
In an interview with Axios, Snap CEO Evan Spiegel endorsed Elon Musk's idea of turning Twitter into a "super app" like Tencent's (TCEHY 1.60%) WeChat, which allows its Chinese users to send messages, buy products, make payments, play games, and access a wide range of other services without launching any external apps.
Spiegel also confirmed that Snap had plans to turn Snapchat into a similar super app over the long term. It isn't surprising to see Snap follow Tencent's lead, since the Chinese tech giant previously acquired a 12% stake in Snap back in 2017 when many investors had lost faith in the company.
Snapchat already hosts a mini-ecosystem of messages, videos, games, AR features, and mapping services. The company also previously discussed its ongoing development of integrated e-commerce, payment, and digital token services during its investor day presentation last year.
If Snap successfully pulls all those pieces together into a sprawling app like WeChat, it could attract more third-party partners -- which would likely rush to integrate their services into Snapchat to reach more Gen Z and millennial consumers.
But do these green flags make Snap worth buying?
Snap would certainly benefit from a new ban on TikTok. And the expansion of its ecosystem with Snapchat Plus and new super app features could certainly make it a more diversified social media platform like Facebook.
But on their own, these green flags won't resolve the company's pressing issues of slowing ad sales, Apple's platform changes, and its glaring lack of profits. For now, investors should focus on those near-term issues instead of Snap's longer-term ambitions.
