Snap, Inc. (SNAP) is a social media company providing a camera platform in the U.S. and internationally.
It has developed many technological products and services, including Snapchat, which uses the camera and editing tools to take and share Snaps, Bitmojis (personal emojis), and Spectacles, which are wearable sunglasses capable of taking Snaps and interacting directly with the Snapchat application.
Snap’s main source of revenue is advertising. The company learned a painful and what I consider a game-changing lesson when it reported its third-quarter 2021 report back in late October.
Snap is to “blame” Apple, Inc. (AAPL) for this hard lesson, but I argue that there are two sides to this story that led to a strong sell-off of approximately 27% for Snap stock on October 22.
I am bearish on SNAP stock because of this major news and because the social media firm continues to remain unprofitable despite robust sales growth.
SNAP Stock Earnings: Waiting To Turn Positive
SNAP stock earnings as of Q4 2019 have both been negative and weak. What is notable is the trend of them. In the past eight quarters, SNAP stock had four misses and four beats. The other interesting fact is that they are reported within a tight range, from -$0.05 to -$0.23.
Can Snap become profitable anytime soon? If we analyze the lesson learned and delivered by Apple, the odds are that the path to profitability for Snap should be very bumpy, full of risks and challenges.
What Happened and Why It Matters So Much for Snap’s Business
Back in April, Apple decided to implement privacy changes to its mobile device operating system, prompting users to opt in or out of being tracked by advertisers. The new feature introduced by Apple back then (called ATT, or App Tracking Transparency) is very important, as it prevents advertisers from tracking iPhone and iPad users without their consent for marketing purposes.
This change related to the consent or not of Apple’s mobile devices users to get tracked about their preferences, demographics, trends about browsing history, amount of time spent online visiting sites is huge. It may force small businesses to pay more advertisers for their marketing campaigns to reach their specific marketing campaign goals.
At the same time, large companies may have to explore alternative marketing channels other than Snap. This is bad news for Snap. What are some of the most important questions to be answered now? One of the many class-action lawsuits filed against Snap is enlightening.
Answers That May Shed Plenty of Light on Snap’s Business Prospects
One particular class-action lawsuit against Snap focuses on whether the company made false or misleading statements about these five key factors:
“(1) Apple’s privacy changes would have, and were having, a material impact on the company’s advertising business; (2) Snap overstated its ability to transition its advertising with Apple’s privacy changes; (3) Snap knew of, but downplayed, the risks of the impact that Apple’s privacy changes had on the company’s advertising business; (4) Snap overstated its commitment to privacy; and (5) as a result of the foregoing, Defendants public statements and statements to journalists were materially false and/or misleading at all relevant times.”
When Snap released its third-quarter 2021 report that missed on revenue, coming in at $1.07 billion vs. $1.10 billion, the stock price fell almost 27%, to close at $55.14 per share on October 22, 2021, compared to a closing price of $75.11 the previous day.
Lesson Learned by Snap
Snap had to learn the hard way that in business, you must always be on alert for crucial changes outside your control. You must be flexible to adapt to new conditions. Never rest on what seems to be working. Have a backup plan to support your business model.
Snap could find other ways to generate revenue and work on alternative plans. If it can do this and stay ahead of the competition, it can drastically improve its business going forward.
Wall Street’s Take
Turning to Wall Street, Snap has a Strong Buy consensus rating based on 21 Buys and six holds assigned in the past three months. The average Snap price target of $73.92 implies a 51.9% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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