Lessons from A Tweet that Wiped out $1.3B Off SnapChat’s Market Value

I couldn’t believe my eyes when I saw that Snapchat lost more than 7% just because of a single tweet! I quote from Bloomberg (just in case you think we are fake news, we aren’t): “on the heels of a tweet from Kylie Jenner, who said that she doesn’t open the app anymore.”

A popular piece of advice given to most beginner investors is to invest in things that you are familiar with and see in real life. Sometimes this really is good advice because you can see the products in your daily life and it is an indication of how well the company is doing. On the other hand, it can sometimes give you the wrong signal that a company is doing well even when it isn’t. What you can infer from this is that there is a lot more to choosing a stock than just because you know it and it is popular. It is more about the fundamentals of the stock and the company.

Why fundamentals are so important

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The fundamentals of a company are what determine the intrinsic value of the company and that in turn plays a part in the determination of its stock price. Of course, determining the value of a stock is an immensely difficult task and that is why banks pay analysts huge paychecks and even they can’t get it right sometimes. (Or most of the time *cough* *cough*) But, it is very easy to tell if a company is good or bad and that is by looking at its earnings and potential for future earnings. You have to look out for things like increasing revenue, earnings, how profitable the company is and the competition in the industry. By looking at all these figures you should be able to form an opinion on the future earnings of the company (this determines the share’s value). Now let’s do this for Snapchat. Snapchat earns its money through advertising in its app. They had a 1-year revenue growth of 104% to $824.9m which may sound pretty good, however in order to double their revenue, they had to hextuple (I didn’t know this was a word) their losses from $514.4m to $3.4bn plus, they have basically been making a loss since day 1. And you may be thinking: So what? Maybe they’re still growing so give them more time! Maybe you are right, but right now their narrow business model has massive competition from larger and more profitable tech companies i.e. Instagram (owned by Facebook). So what differentiates them from and makes them better than the rest so that they can start making profits in the future? Maybe they will succeed, who knows? But what is certain is that the answer is uncertain and that isn’t good for its share price either.

So the whole point of this story is basically to say that, don’t just buy shares because you know them and they look cool and everyone is sending snaps with filters and dancing sausages. You have to do your research and make sure that you are sure that the company has a sustainable way to increase future profits.

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