The mobile revolution has taken firm hold in the United States, where 81 percent of people now own a smartphone. The growth of the U.S. smartphone market has enabled users to communicate and share more of their lives on social media more easily than ever before.
One of the biggest social media networks in the U.S. is Snapchat, a mobile app for photo and video messaging that is likely familiar to anyone with a smartphone under the age of 30.
The app’s parent company Snap [NYSE: SNAP] is enjoying a strong year so far with share prices up since January. But is Snap a good buy for investors, or should they steer clear in light of some warning signs?
What Does Snap Do?
Snap [NYSE: SNAP] is a social media technology company that is best known for its mobile application Snapchat, which allows users to send photo, video, and text messages that disappear after a given amount of time.
The ephemeral nature of Snapchat messages appeals to users who want to share moments from their daily lives without saving them online for an indefinite amount of time. Originally named Snapchat, Inc., the company was rebranded as “Snap Inc.” in 2016.
Beyond its Snapchat app, Snap also produces Spectacles, a pair of camera-enabled augmented reality sunglasses that can record video and send it directly to users’ Snapchat accounts.
The initial launch of the Spectacles was not very successful; according to a 2017 estimate, just 0.08 percent of Snapchat’s user base purchased a copy. However, in August 2019 Snapchat announced a new third version of the product with a sleek new redesign and a second HD camera to create depth perception.
Snap [NYSE: SNAP] was founded in 2011 by three students at Stanford University: Evan Spiegel, Bobby Murphy, and Reggie Brown.
Spiegel has served as Snap Inc.’s CEO since the company’s inception. Snap is headquartered in Santa Monica, California and employs an estimated 2,700 people as of 2019. The company’s main competitors include other major social media networks such as Facebook, Twitter, YouTube, and TikTok.
Is Snap a Buy?
With all this in mind, what are some reasons that investors should be interested in purchasing Snap stock?
In May 2019, shares of Snap jumped by 4 percent in a single day after the company announced talks with music record labels to incorporate popular songs into their messages.
Analysts believe that this will allow Snap to further compete with rivals such as Facebook and TikTok that already include such functionality.
Snap [NYSE: SNAP] is also banking big on its new third edition Spectacles, which it wants to use to spearhead a new augmented reality initiative.
The company is raising $1 billion in debt, which it reportedly wants to use in part to develop more augmented reality technology. This could take the form of new features and enhancements to its Spectacles, or more advanced tools and filters from within the app itself.
More good news for potential investors: Snap is having a strong 2019. Shares of the company stock soared after it reported its Q2 2019 results, which saw the greatest increase of daily active users in three years.
In the second quarter, Snap posted revenue of $388 million, surpassing its own estimates of $360 million. The new revamped version of the Snapchat app for Android phones, as well as the “gender swap” filter that went massively viral, both helped contribute to the growth of the app last quarter.
What are the Risks of Buying Snap?
One big risk of buying Snap stock is that the company faces stiff competition in its niche from other large tech firms.
In 2016, the photo sharing app Instagram introduced “Instagram Stories,” which are photos and videos that are visible for only 24 hours, mimicking the nature of Snapchat.
While it was created after Snapchat, Instagram Stories has now far outstripped its original inspiration: according to a 2018 study, Instagram Stories now has 400 million daily users, while Snapchat is still below 200 million users in total.
Facebook, the owner of Instagram, has also introduced a similar feature on the main Facebook platform with vanishing photo and video content.
Another point of concern about Snap is the company’s workplace environment, which can drive pessimism among investors. A survey of Snap employees found that 39 percent of them regretted working at the company, which is extremely high when compared with competitors.
What’s more, Snap suffered a wave of high-profile layoffs in 2018, including the departure of 120 engineers. That year, the company also settled three lawsuits by former female employees alleging that it was a “toxic” and “sexist” place to work.
Snap Stock Forecast Summary
Snap [NYSE: SNAP] is an interesting opportunity for investors, depending on how they view the mobile app’s prospects in the short to medium term.
While Snap is having a bit of a turnaround at the moment, it’s also hard to ignore some of the warning signs. The company has been outcompeted in its own niche by larger players such as Instagram and Facebook, and it has quite a lot of catching up to do.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.