Snap Still Looks Unattractive, Even At Record Lows

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The downward spiral Snap finds itself in seems to have no end in sight. The share price of the social media giant traded near a record low yesterday after news reports that Chief Strategy Officer Imran Khan is leaving the company in the middle of its turnaround.

Snap (NYSE:SNAP) stock, which fell more than 2% at one point yesterday, has lost more than half of its value from its 52-week high as investors find it hard to believe that the company has found a way to meaningfully monetize its Snapchat app, one of the most popular sharing platforms among young people and the celebrities they follow.

Snap Still Looks Unattractive, Even At Record Lows

Snap (SNAP) 1-Year Chart

Khan’s departure is the latest blow for CEO and co-founder Evan Spiegel, who has faced a high executive turnover since the company’s initial public offering. In little over a year, he has lost or replaced Snap’s heads of finance, legal, engineering, product and sales.

Khan’s departure comes at a critical juncture for the company, which is struggling to show that it can survive in this very competitive environment for social media. In the second quarter, Snap missed Wall Street’s expectations for advertising sales as the redesign of its flagship product failed to generate excitement. In that quarter, Snap reported a decline in daily users for the first time.

This bleak picture makes it very tough to get excited about the stock. But is it too a gloomy picture for a company that has more than 188 million users, who represent the most important demographic in the market? Snapchat’s disappearing posts, a feature known as Stories, was so popular with teenagers in the U.S. and Europe that Facebook (NASDAQ:FB) has made the concept a core part of its own services, most notably Instagram.

This argument may have its appeal, but building a bull case for Snap shares even after they plunged to a record low doesn’t yet make sense. So far, there is no sign that the company could soon become a viable social platform that can generate strong revenue and defend its turf against much bigger rivals.

The app attracted 10 million fewer users last quarter when compared with the same period a year ago. During this period, Facebook’s Instagram stole the show, with active users surpassing 1 billion for the first time.

Facebook, which copies almost every popular feature that Snap builds, seems a much better bet for social media investors. Snap generates $1.40 of revenue in terms of ads from each active user. That’s nowhere close to Facebook’s $9 per user.

A Tough Social Media Environment

Snap’s business fundamentals are deteriorating at a time when the operating environment for social media companies in general has become significantly challenging.

Big social media giants, including Facebook and Google’s parent Alphabet (NASDAQ:GOOGL), are spending billions of dollars on their platforms to make them more secure and acceptable for regulators in the wake of the Cambridge Analytica scandal and allegations of Russian manipulations in the U.S. elections.

For Snap, increasing its ad sales and outbidding much bigger competitors in this environment won’t be an easy task. The biggest issue that we have with Snap is that there aren’t many unique features left about its app and it doesn’t make sense for advertisers to reward the company when its rival is doing much better.

That said, there is one potential trigger for a powerful rally in Snap stock and that’s about Snapchat being acquired by a giant that has deep enough pockets to compete with Instagram. But for that to happen, we think Snap has to grow and acquire a significant scale to make a case for a premium valuation. Snap, in its current state, isn’t there yet.

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