Since the company reported quarterly results, shares of Snap Inc (NYSE: SNAP ) gave up some of its post-rally gains. Investors grew wary over the latest app update and news that the company was already downsizing the company. For a tech firm that is supposedly still in a growth phase, a job cut signals the very opposite. Does Snapchat's stock still have any upside potential despite the bearishness against it?
Bearishness for Snap Stock is High
With shares at a short float of 24.4 percent, bearishness is extremely high. Any stumble by the company is welcome by bears. So when worries surfaced over the latest app refresh confusing users and potentially causing them to stop using the app altogether, the stock's drop was no surprise.
Snap has a strong fourth-quarter behind it, as I wrote on Feb. 27. Still, Snap faces some near-term headwinds. It must align revenue growth to the excessive cost increases. So when Snap cut more than 120 engineering positions on March 8, or 10 percent of the department, it raised some alarm bells. Cutting resources in an area that matters most - product development and implementation - could give its competitors an advantage.
Facebook Inc (NASDAQ: FB ) benefits from users moving from Snapchat to its own Instagram, Facebook Instant Messenger or WhatsApp. Twitter Inc (NYSE: TWTR ), spent more on making its platform simpler, more relevant to users and a better advertising platform for its customers. The effort paid off: Usage on the site grew unexpectedly last quarter, sending TWTR stock to a yearly high. By comparison, SNAP stock is more than 25 percent below yearly highs.
Snap's biggest flaw today may be its response to criticism over its new app design. By failing to revert to the older version, the company is basically telling its users to just get used to it. The layoff in the engineering department sends a negative signal to good talent in Silicon Valley: It will repel good talent. And Snap also runs the risk of scaring its own talented staff and they may leave the company too.
Snap Stock's Shift
Snap is shifting its focus from the end-user engagement numbers for organically grown content to professionally created material. It is starting to add content produced by media and TV networks. The benefit of relying on established, mature content creators is that they tend to be led by influential brands and people. On its quarterly conference call, Snap implied that it will share revenue with its influential users. Celebrities that earn an easy payment just for posting some snaps will pay off quickly if it keeps their followers on the app.
Valuation Risks for Snap Stock
Investors are valuing Snap at levels comparable to Twitter and Facebook, even though growth rates for Snap are slowing. Worse still is that the advertising dollars may gravitate towards Facebook, followed by Twitter and then Snap. Unless the disappearing-message app consistently gives its advertisers a high return on investment, risks are high that Snap will lose business to the competition.
Snap's "snowflake" on SimplyWall.St says:
Per SimplyWall.St , SNAP stock is significantly overvalued . The positives, though, are that the company will grow its earnings by over 60 percent in the year. This pace of growth is nearly three-fold faster than the software industry. Revenue growth of 30.7 percent will outpace the industry by threefold also. The negative points for Snap's past earnings include the company not yet profitable and operating cash flow is still negative.
Takeaway on Snap Stock
SNAP stock will move as emotions move from positive to negative and back. Investors who prefer a less volatile stock may consider Facebook or Twitter stock instead. Those who believe in the unique value proposition in the Snapchat app experience may continue holding Snap shares.
Disclosure: The author owns no shares in any the companies mentioned.
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