Twitter Inc (Nasdaq: TWTR) and Snapchat owner Snap Inc ( SNAP) have long played the saplings against Facebook’s ( FB) giant sequoia in the social media market, and both are making big moves to step out of their bigger rival’s shadows.
And while it’s too early to post a final status update on the fate of these two social media stocks, both companies have a long way to go before they can become a legitimate competitor to Mark Zuckerberg’s famous company.
Twitter has seen its stock price rise 19 percent in the last three months, posting better-than-expected third quarter performance figures in October, along with a highly bullish outlook for the fourth quarter of 2017.
Stock buying levels are at a four-year high, as investors look for a price breakout after the robust quarterly news, and weigh a big structural change in Twitter tweet characters from 140 to 280. Yet sluggish daily user numbers (up 4 percent on a year-to-year basis) and a weaker advertising market on Twitter (21 percent of Twitter advertisers plan to cut ad spending on the site, according to RBC Capital) are big obstacles to continued share price growth.
[See: 7 of the Best Tech Stocks to Buy for 2018.]
Snap trades at $16 per share after a modest rally, but that’s still far below the $30 trading range that SNAP stock enjoyed when the company had its initial public offering earlier this year. Snapchat has 178 million users, and lost 16 percent of its user base on a year-to-year basis in the third quarter of 2017. That’s a big concern for Snap, given that competitors Instagram (owned by Facebook) and WhatsApp Status have added 300 million users since both launched their own social media platforms.
Is Snap facing a steep climb? There’s a growing consensus on social media that the Snapchat app is too difficult to use. Add to that issue a softening user base (4.5 million new users in the third quarter of 2017), especially with Android users, and weak third-quarter revenue results, and there is an internally driven need for change at the social media firm.
Snap founder Evan Spiegel says there need to be some big changes at the company, starting with an overhaul of its troublesome Snapchat messaging app. That move may well work in the long term, but uncertainty abounds for now.
“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behavior of our community will change when they begin to use our updated application,” Spiegel acknowledged on a conference call in November.
Some Wall Street analysts have said that Tencent’s new 12 percent stake in Snap could bolster the company at a critical time. But Tencent may not have Snapchat’s best interest in mind.
“It’s increasingly looking as though Facebook will win this war and Snapchat needs to start finding an exit route,” says John Colley, a professor of strategy and leadership of U.K.-based Warwick Business School. “Tencent, with its recently acquired 12 percent of shares, starts looking like that exit route. Perhaps Tencent is looking for a vehicle to take on Facebook.”
Yet Facebook remains the 800-pound gorilla that Snapchat can’t overcome.
[See: Short Selling: 7 Stocks Pro Traders and Billionaires Hate.]
“Fundamentally, Snap shares their user audience with Facebook, who offer digital advertisers a better deal and lower risk,” Colley says.
“Facebook copies Snap’s features rapidly and a fundamental redesign is not going to change that. Another disappointing earnings statement reflects the pressure from Facebook,” he says. “Without Tencent, there is little to prevent Snap’s decline.”
Mitch Zacks, the primary portfolio manager with Zacks Investment Management in Chicago, says Snap should fare worse than Twitter, as Facebook is better positioned to undercut Snapchat with its Instagram success.
The value of a social network grows exponentially as the number of users increases, Zacks says. “A person will almost always choose to join the social network with the most users even if the largest network has much weaker functionality than competing networks,” he says. “As a result, the long-term future does not look very bright for Snapchat as all Facebook has to do is copy Snapchat’s offerings. Facebook can effectively eliminate the competition simply by copying the functionality of any smaller but growing social network.”
There are doubts for Twitter, too. Twitter has similar troubles, as users tire of the tweeting experience and begin to level off on the social media site — a trend that investors notice, even if Twitter balks at the numbers.
“I was an early investor in Twitter, but I sold the stock a year after the IPO after I felt the company was failing to capitalize on their platform,” says Kevin Kleinman, an active trader at Watchhimtrade.com.
After Twitter announced some encouraging user metric data with its latest earnings report, Kleinman says he started contemplating investing in the shares again. “However, I am taking a wait-and-see approach,” he says. “Twitter has not earned the benefit of the doubt as a public company, and investors have been burned. They need to show me a solid report or release a mid-quarter update that highlights a positive trend in their user growth.”
With Twitter, investors are beginning to adopt a mindset of “fool me once, shame on you; fool me twice, shame on me,” Kleinman says.
“Right now, Twitter could still be fooling people,” he says. “The stock has been beaten down, and is still trading 70 percent below its all-time high. That suggests that if they are really turning things around, there will be plenty of time to make money on the way back up.”
[See: 7 ETFs You Have No Business Buying.]
That said, it would surprise the market if shares went back to $30 quickly, let alone approach the $70 level it hit in 2013. “Historically, it takes a long time for a stock down as much as Twitter to start recovering those losses, and patience is better suited than feeling you are missing the bottom,” he says.
More from U.S. News
9 Investing Myths That People Still Believe
Artificial Intelligence Stocks: 10 Companies Betting on AI
7 Ways to Tell if a Stock Is a Good Price
Twitter Inc (TWTR) and Snap Face an Uphill Climb originally appeared on usnews.com
