Amid the discourse of trade wars and interest rate increases, 2018 is likely to end with more market volatility and lackluster returns for many stocks. Even companies with strong fundamentals have experienced pain and falling stock prices. Experienced investors know that markets can go quickly down as much as they go up, yet well-managed companies with robust business models and balance sheets eventually come back. On the other end of the spectrum, some companies hardly ever recover from the downturn: I regard Snap (NYSE:SNAP) stock to be one of those stocks whose pain is not likely to end any time soon.
Here’s why you should avoid SNAP stock.
The Crucial Reasons Behind Snapchat Stock’s Downtrend
Since its Initial Public Offering in March 2017, SNAP investors have not had much reason to be pleased with the performance of the SNAP stock. After an IPO price $17, and a subsequent high of almost $30, SNAP now trades around $6.50 per share.
SNAP stock may be a classic case of when being popular does not necessarily translate into being profitable. Despite the growth of the Snapchat app — the self-deleting messaging service — many analysts have never been entirely convinced that SNAP has a viable business model where it could monetize the app’s popularity. In other words, Wall Street is asking whether every cool app will become a publicly traded company. The consensus right now seems to be that Snap’s IPO was somewhat premature.
The balance sheet and the income statement of Snap Inc stock would give every value investor a pause for concern: So far, the company has burned through about $1.5 billion in less than two years. In addition to the negative cash flow — the company may need to raise more cash in 2019 — user growth is decreasing, partly due to the competition from Facebook‘s (NASDAQ:FB) Stories )the copycat format of Snapchat where user updates disappear after 24 hours). All of this has weighed down on SNAP stock.
In an attempt to diversify and increase Snap’s revenue stream, its management has been trying to introduce new products such as Spectacles, smartglasses to record video for Snapchat. But this has come with little — if any — meaningful success.
The costly experiment of Spectacles has left many Snap Inc stock investors wondering if they can trust the management to take the necessary steps to make SNAP profitable in 2019 or, at the latest, by 2020 when the company will run out of cash.
Snap Under Investigation
Following a class action lawsuit of May 2017, SNAP recently revealed that the U.S. Justice Department and Securities and Exchange Commission (SEC) were investigating company for its IPO disclosures, which could have misled potential investors.
The main issues in the subpoena center around potential competitor threats, especially from Facebook and whether Snap leadership made “materially false and misleading statements” about the prospects of its business. Depending on how the U.S. regulators decide to move on, the SNAP stock price may suffer even further as a result of the lawsuit.
The Bottom Line on SNAP Stock
I expect 2019 to be a year of struggle for survival for Snap Inc stock as the company needs to work on securing funds and achieving user growth.
Although the company is likely to find additional money, either through raising equity or securing debt, neither option would boost the Snapchat stock price. Unless management can work through the fundamental problems of mounting losses and slowing user growth, SNAP’s share price could easily go further down, at which point the company could become a takeover target.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.