What does the social media industry look like in 2020?
The social media industry has seen increased engagement this year as more people stay and work at home because of the coronavirus pandemic. In a recent announcement, Facebook (FB) said that the overall usage of its assets has increased, with messaging growing by more than 50 per cent. In another report, Twitter (TWTR) stated that its daily usage has already inched higher by 23 per cent.
Snap (SNAP), the maker of the popular Snapchat app, did not stay aside during the ongoing quarantine. The company has partnered with the World Health Organization (WHO) and the Centers for Disease Control (CDC) to disseminate accurate information about the deadly disease.
However, social media companies have not benefited financially. This is because advertisers, who are their main source of income, are not spending money on the platforms. As a result, their share prices have been punished. Snap’s stock has declined by about 26 per cent this year. This is worse than the overall S&P 500 (US 500), Facebook and Twitter, which have dropped by about 19 per cent.
In this article, we take a look at the company’s basics, recap its recent stock performance and review the latest Snap share price forecast for this year.
What makes Snap stand out from the social media crowd?
Snap is a company similar to Facebook and Twitter. Snapchat, the company’s main product, allows users to send messages, videos and photos to each other. Its “Discover” feature gives them curated news from relevant sources such as the New York Times (NYT), celebrities, and famous influencers.
While Snap offers similar services to Twitter and Facebook, the company has several unique features. First, in its own words, Snap describes itself as a camera company, while the other companies describe themselves as social media platforms.
Second, Snap’s demographics differ significantly from those of the other firms. It boasts a relatively younger number of users. In fact, more than 78 per cent of its users are aged between 18 and 24. This compares to the median age of Twitter users, which is about 40. For Facebook, this figure stands at 41.
Third, Snap generates most of its revenue from the US. In 2019, 62.27 per cent of its $1.7bn revenue was from the country. In comparison, only 45.7 per cent of Facebook’s $70bn in revenue was from the US. In 2019, Twitter generated more than $1.9bn from the US, which was 55 per cent of the total.
Fourth, as attention has turned to privacy, Snap has been spared from the outrage because it takes more measures to avoid privacy concerns.
Another difference is that Snap focuses mostly on its mobile users, while the other companies focus on multiple devices. Finally, another difference is that in 2019, Snap spent more than 50 per cent of its total revenue on research and development while Facebook and Twitter spent 18 per cent and 19 per cent respectively.
Snap stock performance: never-ending volatility
Before we dive into a Snap stock outlook, let’s recap how the business has performed over the past few years.
Snap went public in February 2017 by selling 200 million shares to investors. It raised more than $3.4bn, reaching a valuation of over $33bn. Since then, the company’s share price has been on a real roller coaster.
It dropped to an all-time low of $4.99 at the end of 2018 as investors worried about its prospects. At the time, investors were disappointed with the company’s Android app redesign and lack of user growth. They were also concerned about Facebook, which was launching products similar to those offered by Snap.
In 2019, Snap’s stock price started to climb as investors moved past its previous year’s failures. The company also started to increase and maintain its number of users. Most importantly, it has finally begun to grow its revenue, which rose by 45 per cent in the most recent quarter. This was higher than the industry average of about 3.45 per cent according to data from Seeking Alpha. As the company did this, its stock started to rise, and in January 2020, it reached a high of $19.11.
The latest Snap stock analysis to consider before investing
Snap’s stock is now trading around $12, giving it a market valuation of more than $16.85bn. This is about $3bn less than Twitter’s valuation of about $19bn. This comes despite the fact that Snap generated annual revenue of just $1.7bn compared to Twitter’s revenue of more than $3.4bn. Also, Snap made a net loss of more than $1.3bn , while Twitter’s net profit stood at $1.4bn.
Part of the reason why Snap is highly valued is that investors believe that it is a valuable asset, especially among its key demographic. Another reason is that the company’s revenue growth is much higher than that of Twitter and Facebook.
According to data from Seeking Alpha, Snap revenue grew by 45 per cent in the most recent quarter compared to Twitter’s 13 per cent. Facebook’s revenue grew by 26 per cent during the same period.
Additionally, expectations of future revenue growth also favour Snap. The company’s forward revenue growth of 36 per cent is higher than that of Twitter and Facebook, which are projected to grow by 11 per cent and 20 per cent respectively.
However, Snap is still facing two big challenges. First, with most of its key users ageing, the company will need to attract more young people to its platform. Second, competition in this demographic is rising, with most of it coming from TikTok, a Chinese company. According to Omnicore, the average age of a TikTok user is below 34.
Perhaps, the biggest challenge for Snap is on how to achieve profitability since the company lost more than $1bn in 2019. Looking at its finances, we see that the company can easily become profitable by slashing its costs and expenses. For example, it can lower its R&D costs to come to par with that of Facebook and Twitter. If it did that, the company would spend about $343m instead of $883m. Similarly, if it spent 13 per cent of its revenue in sales and marketing as Facebook did, it would have spent about $223m instead of $458m. The challenge is on whether the company would achieve this growth by cutting these costs.
Snap share price forecast: what the future holds
It is rather hard to give a certain Snap share price forecast at this point as the impact of the coronavirus on its business is yet to be discovered. Also, the company has not updated investors on whether it plans to adjust the previous guidance or not. Still, there are several ways to predict whether this is a good time to invest in Snap or not.
First, let’s take a look at the recent targets set by the Wall Street analysts:
As seen, analysts have offered divergent views on the company. Those at SunTrust, Morgan Stanley (MS), JP Morgan (JPM), Citigroup (C), and UBS (UBS) have lowered their price target while those at Rosenblatt, Credit Suisse Group (CS) and Atlantic Securities have boosted their estimates.
Meanwhile, Snap’s insiders, including the CEO, have been selling their shares in the company. This usually sends a bad signal to investors because it shows that those in the know are not confident in the business’ future. Last year, Katrina Lake, the CEO of StitchFix, sold a large block of shares before the company released weak earnings.
Snap shares forecast based on the technical analysis
Is Snap stock a good buy right now? At this moment, it does not really seem so. There are several red flags, including insider selling, competition, estimated low ad spending this year, and technicals that weigh heavily on the Snap stock predictions.
On the daily chart below, we see that Snap is in the fourth phase (corrective) wave of the Elliott Wave formation. This is evidenced by the fact that the stock has found resistance at the 38.2 per cent Fibonacci Retracement level. This means that the share price is likely to fall in the near term.
The bottom line: is Snap stock a good investment in the long term?
Snap seems to have several significant headwinds in the near term. With many businesses not doing well, the company could face growing challenges especially in the rest of the world. The business is making significant losses and the frightened insiders are selling.
Further, activity in the options market suggests that some big investors are betting the stock will fall. Finally, technical analysis suggests that the current upward movement could be a dead cat bounce, which means that the stock could move below its YTD low of $7.84.
Witnessing the ongoing economic turbulence, it is crucial to consider the latest news, market trends, expert opinion and technical analysis when choosing what stock to invest in. We always recommend that you should arm yourself with as much knowledge as possible.
If you think you are not ready to make long-term investment commitments, but still want to try to profit from the stock’s volatility, you can do so through contracts for difference (CFD).
You can learn more about CFD trading with free online courses and find out how to trade SNAP CFDs by reading our comprehensive guide. Always stay on top of the latest Snap news with Capital.com.
So, what do you think about the future of this media company? Are your Snap stock predictions bullish or bearish?
Follow our live SNAP chart and make your own bets!