SNAP Stock Needs a Miracle to Recover From Latest Quarter

Stocks to sell

Usually, a top-and-bottom earnings beat leads to investor celebration. But when you’re heading Snap (NYSE:SNAP), nothing comes easy. Despite exceeding Wall Street’s profitability and growth expectations for the third quarter, SNAP stock dropped double digits in the markets.

Is this a case where the technical indicators misalign with positive fundamentals? No. Rest assured that the Street has this one absolutely spot-on. While the revenue haul of $298 million was impressive — analysts forecasted $283.2 million — and it confirmed traction towards management’s monetization efforts, the daily active users (DAUs) count fell short.

Snap was only able to bring in 186 million DAUs in Q3, which is a devastating number. Sequentially, the company dropped 1% from the 188 million users from Q2. Against the year-ago quarter, the social-media platform increased DAUs by a mere 4.5%. For context, that’s the lowest year-over-year growth rate going back to Q1 2015.

Therefore, the extreme volatility in Snapchat stock is quite understandable. In the world of social media, you’re nothing without user growth and engagement.

And while it’s no comfort to those who have been long SNAP stock, this crisis was a known risk factor. Earlier this year in February, I cautioned InvestorPlace readers that DAU growth was peaking. Although the bulls praised the company’s growth on a nominal scale, I was instead looking at magnitude. From that angle, Snapchat genuinely looked ugly.

During the time when the platform had fewer than 100 million subs, outrageous growth was the norm. Essentially, Snapchat stock benefited from the law of small numbers. But as DAUs crossed the 100 million threshold, the company had a harder time gaining traction.

We didn’t see that problem for Facebook (NASDAQ:FB) and, to a lesser extent, Twitter (NYSE:TWTR). This points to an obvious, but underappreciated, flaw.

SNAP Stock Is an Ageist Investment

In this politically divided time, we hear about increasing discrimination-based incidents. The commonality here is ignorance. However, one form of discrimination is the dumbest because it’s hatred towards an inevitability: ageism. And, in a way, SNAP stock is an ageist investment.

For the longest time, Snap prided itself as a youth stronghold. Its fierce rival Facebook had every other demographic on lockdown except the older teenager/young 20s crowd. The whole reason Facebook bought out Instagram was to shore up this weakness.

However, Snap fended off its much-larger rival’s efforts because its platform simply resonated better with young people. As a result, Snapchat stock benefited from the occasional burst of investor sentiment.

Unfortunately, management spent too many resources appealing only to youth. While I doubt that baby boomers will find Snapchat useful, it was critical to find some other demo or audience. Otherwise, well-resourced Facebook could bombard the youth market until SNAP stock cracked.

That’s essentially what happened. As our own Will Healy reported, Instagram is now the most popular social media app among teens. Combined with the overall DAU losses, Snapchat stock becomes a no-win proposition if it loses any youth subsegment.

Worse yet, if you’re going to focus on age so resolutely, you must do youth right. Snapchat does youth wrong — and it reflects in the extreme volatility towards SNAP stock.

According to the Pew Research Center, “Hispanics are the youngest major racial or ethnic group” in the U.S. According to the report, nearly 60% of Hispanics are Millennials or younger, and nearly half are younger than 18. In other words, the prime demo for Snapchat, and by logical deduction, SNAP stock.

But is the company winning with Hispanics? Nope! Teenaged Hispanic Snapchat users rank significantly below white and black teenagers’ engagement levels.

Snapchat Stock Has Nowhere to Grow

Based purely on a trading perspective, I’m hesitant on outright shorting Snapchat stock at this juncture. Shares have lost an incredible amount of value. Plus, the selloff has finally and noticeably slowed down in recent weeks.

In the nearer-term, it’s not out of the question to see SNAP stock perform a dead-cat bounce. Of course, at this price, the company also becomes a compelling buyout target for its data-mining riches.

But setting that argument aside, the problem for Snapchat stock moving forward is that it has nowhere to grow. Sure, the platform thrives on its robust, intimate network as opposed to an active-user arms race. However, this still doesn’t take away from the fact that Snapchat is youth-centric, and at some point, youth moves on.

I don’t know exactly why the two million users left from Q2 to Q3, but I have an idea: Snapchat doesn’t scale to age. Facebook has Instagram, which naturally segues into its namesake platform. Twitter is ageless in that it appeals to celebrities, businesses and leaders of the free world.

But “rainbow puking” your friends? That’s an ephemeral focus for what is looking like an ephemeral company.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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