Snap Inc (SNAP) Stock: The Gains Will Be Ephemeral

Not long ago, Snap (NYSE:SNAP) looked doomed. In fact, it appeared that the company was facing a MySpace-level fate.

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Yet all buzz was an overreaction. From mid-December, Snapchat stock has nearly doubled — with the market cap hitting $13 billion.

Granted, there were technical factors at work.

Of course, the explosive rally in the markets was a major contributor for the bull move in Snap Inc stock. There was also the impact from a short squeeze.  This is when short sellers have little choice but to buy back stock to cover their positions.

But there were some positive fundamentals for SNAP stock as well. In the latest earnings report, revenues grew by 36% and the adjusted net loss was 4 cents — representing a nice beat. Keep in mind that the company has been focused on cost-cutting, which has been paying off.

Yet, there are some other encouraging developments that have boosted SNAP stock, such as:

The company has released an improved app for Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android operating system. This should open up more growth opportunities. The original show “Dead Girls Detective Agency,” developed with NBCUniversal, has reached over 14 million viewers. Snap has been investing more in foreign markets, including France, Germany, Ireland, Norway, the UK and India. The daily viewing of Publisher Stories and Shows has increased by 30% on a year-over-year basis. A new cartoon, called Bitmoji Stories, has attracted over 40 million viewers. Snap Pixel logged more than 600 million purchase events in Q4, up from 230 million in the prior quarter.

But perhaps the most important factor for SNAP stock is the young demographic. For example, over 70% of the 13 -to 34-year-old population in the US watch its premium mobile ads every month. This is certainly a big-time validation of the platform, since reaching this group has been particularly difficult with traditional advertising channels.

User Issue With Snap Inc Stock

It does appear that the decay in the user base has stabilized. But this is not necessarily a good thing.  Keep in mind that the quarter-over-quarter growth was flat. And, on an annual basis, there was still a drop of one million users.

Yes, user growth is absolutely critical for any social platform. It is what has made Facebook (NASDAQ:FB) and TENCENT (OTCMKTS:TCEHY) into powerhouses.

But when a social platform is more of a niche, the valuation will likely be muted. Just look at Twitter (NYSE:TWTR).  Even though many efforts have been made to improve the platform, not much has moved the needle in regards to the user base.

Unfortunately, this also appears to be the case with SNAP.

Even worse, FB’s Instagram is still a huge problem for the company. The app continues to gain traction, especially with younger users. According to a survey from Piper Jaffray, Instagram has surpassed Snapchat as the most-used among US teens.

Instagram has also been able to be quite adaptable — with the users spanning age groups. Note that the app has more than 1 billion users.

Bottom Line On SNAP Stock

Snap is certainly a viable platform. And, again, it’s young demographic is valuable.

Yet, despite this, SNAP stock is still quite expensive. Consider that the shares are trading at a hefty 10 times sales. This is a significant premium for a company that is expected to grow at only about 24% to 34% for the current year.

Besides, as seen over the past couple years, SNAP stock has pulled off major gains — but that has proved temporary. The problem is that the business has been choppy and the user growth sluggish. In other words, it’s probably best for investors to take profits on SNAP stock for now, not take a larger position.

Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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