Why Snap Stock Tanked 7% Yesterday

SNAP StockSnap Stock Challenges Rise After the Quiet Period

Snap Inc (NYSE:SNAP) has hit the headlines again and, this time, not for positive reasons. Facebook Inc (NASDAQ:FB) introduced new “Snapchat”-like features to the “Facebook” app and Snap stock plunged by 6.8% to close at $22.21 on Tuesday. This is not the first time the social networking giant has copied Snap’s features, but now that Snap has gone public, this may be its biggest challenge ever.

In a blog post, Facebook outlined the new camera effects it added to make it easier for users to communicate through photos and videos. The Facebook camera boasts the same effects as those of Snapchat, like masks, frames, and interactive filters that can be applied to videos and photographs. (Source: “More Ways to Share with the Facebook Camera,” Facebook Inc, March 28, 2017.)

Not only this, but Facebook has also introduced “Facebook Stories” after garnering much success with “Instagram Stories,” which again was a clone of “Snap Stories.”  

With Facebook Stories, users will be able to share multiple photos and videos as part of a visual collection atop their news feed. These photos and videos will disappear after 24 hours. Facebook commands a substantial user base, which is more likely to stick around longer with these new features, and this may be a big challenge for Snap Inc. Many users may even shift to Facebook if they do not find any substantial difference from the Snapchat features.

The Snap stock chart below shows the roller coaster ride that it has been on since its debut on March 2. It had surged by about 44% in its stock market debut, and has been gradually losing ground since then.

SNAP stock

Chart courtesy of StockCharts.com

Contrast the situation just a day back when Snap stock investors were an emphatic lot. On Monday, after the quiet trading period ended, the stock had popped up by almost five percent, following a string of bullish reports by the firms involved in the company’s initial public offering (IPO).

RBC Capital Markets analyst Mark Mahaney was upbeat about the level of innovation brought about by Snap for both consumers and advertisers in the mobile space. And the firm believes that if Snap can sustain this momentum, it can be on its way to high growth and profitability sooner than later. (Source: “Snap’s March Madness stories show how it intends to keep millennials hooked, says RBC’s Mahaney,” CNBC, March 27, 2017.)

Mahaney is one of the most bullish analysts on Snap Inc, with a price target of $31.00 for Snap stock. In its semi-annual survey of users and advertisers, RBC found that 50% of millennials and 20% of 36- to 50-year-olds in the U.S. are currently using Snapchat. Mahaney believes that this is a bullish indicator, and he says that the only thing Snap has to do is to continue innovating.

But this may not be that simple.

Snap Inc Has a Loyal Base of Young Users

There are obvious challenges to the growth of Snap Inc like the slow user growth and no profits, but the biggest challenge has always been the lack of competitive advantage. The way companies like Facebook keep imitating its features, it is hard to think that there would be anything unique and innovative coming out of Snap Inc at a regular pace.

However, this does not mean that Snap cannot grow and Snap stock shall remain at low levels.

If Snap can sustain its loyal base of young users, there is nothing to stop it from growing. This would keep advertisers interested in the platform as well as push Snap stock higher. Snap offers many possibilities for advertisers to engage with their target audience and this bodes well for its future. Snap presents a promising third option for advertisers, after Facebook and Google parent Alphabet Inc (NASDAQ:GOOG, GOOGL).

Though difficult, Snap may turn the tables in this social media battle. The best option for Snap right now would be to announce a new product or feature; it’s possible that the company is working on many. But a little assurance for investors would go a long way for Snap stock. Snap Inc needs to act faster and respond better as Facebook intensifies its attacks on Snap’s turf. Until then, it is wait-and-watch for investors.