Snap Inc. (NYSE:SNAP) underperformance in the market look set to continue heading into 2019. Investors’ sentiments in the stock have hit all-time lows, amidst weakening fundamentals. A bearish stance in the market has not helped the situation further fuelling the sell-off wave.
The stock finds itself in a precarious position having lost more than 70% in market value since the start of the year. After trying to consolidate above the $6 a share, the sell-off wave appears to have gained pace in recent days triggering a breached of a key support level.
With the stock currently flirting with all-time lows, things are not looking any better for the social media networking company. After the recent plunge, the stock needs to rise and stabilize above the $7 a share level if it is to avoid further sell-off. Above the $7 a share level, the stock should make a run for the $10 a share level, a critical resistance level.
Why is SNAP Dropping
Cash Generation Concerns
However, given recent developments, SNAP looks set to continue trading lower. While most people may argue that the stock is a bargain at current levels that may not be the case The stock is still trading at five times year’s sales, which still indicates it is expensive.
Cash generation concerns has to be one of the biggest issues clobbering the stock’s sentiments among investors. The company went public in 2017 with about $1 billion on the balance sheet. The amount reached record highs of $3.24 billion mid last year. However, since then, the amount has continued to plunge.
In the recent quarter, the company had $1.4 billion in cash after a double-digit drop. A decline in cash from operating activities all but paints a clear picture of the dire situation the company finds itself in when it comes to cash generation.
While some people may argue that, some of the cash is going towards financing growth opportunities most of it is going towards financing day-to-day operations. Any company that burns cash at a higher rate compared to how it generates will always find itself in trouble especially with investors in pursuit of value.
Slow revenue growth is another issue that appears to have taken a toll on SNAP sentiments in the market. The company reported a 44% increase in revenue in the recent quarter down from a 72% increase in the prior year.
Competition threat is another issue that continues to derail, SNAP performance in the market. The market is entirely concerned about the potential threat posed by WhatsApp, which appears to be copying everything that SNAP does
WhatsApp, which enjoy a daily user base of more than 400 million users, poses a significant threat. The Facebook-powered app has already copied Snap’s two core features the most recent being Stories. The app transitioning to becoming an ephemeral photo-messaging app will be the killer punch on Snap’s international growth prospects.
The broader stock market turning bearish in recent weeks has all but continued to deal Snap’s prospects a big blow. Soaring tensions between the U.S and China has seen stock’s in the U.S market shed a good chunk of the gains accrued over the past one year. Snap is one of the stocks that has continued to tumble.
Snap’s short-term prospects are not looking any good after a recent plunge. The stock breaching a critical support level at the $6 a share level all but points to continued underperformance. Weakening fundamentals also indicate that the stock will continue trading lower as investors sentiments continue to take a hit.