For stock investors, there’s perhaps nothing more exciting than finding that diamond in the rough and buying a stock that takes off for the moon. Even great companies have to start somewhere.

Apple (NSDQ: AAPL), the largest publicly traded company today, is worth about $180 per share. But 20 years ago, you could have loaded up the truck at about $0.40 a share. Even just five years ago, you could have bought it for under $60.

The breakout potential is what draws investors to tech stocks. After all, tech is what would come to mind for most people when they think about life-changing innovation and skyrocketing profits. It’s not an exaggeration to say that Apple has changed the world.

However, not all seemingly great ideas turn out to be moneymakers, particularly when social media can grossly inflate something’s popularity and generate hype.

A good example would be Snap (NSDQ: SNAP), the owner of Snapchat.

An Instant Hit

The app was created about a decade ago by Stanford students who thought of the idea of allowing users to send photos and videos that would disappear shortly after the recipient views the content. Originally, the content would disappear within seconds. Now they self delete in 24 hours.

Photos and videos posted online or sent to others could become a source of regret or embarrassment later on. The idea behind the disappearing feature of Snapchat was to enable users to be more spontaneous and express themselves more genuinely.

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Snapchat was an instant hit, especially among young people. Today, about 380 million people use the app everyday. That’s more than the population of the U.S.

Despite the popularity, how well Snap the company that owns the app, which is free to use, can monetize Snapchat remained a big question. After the stock IPO’ed in early 2017, it floundered… until the pandemic.

A Dud Until FOMO

When people were forced to stay home more, suddenly their digital devices became an even more integral part of their lives. Besides using Snapchat for entertainment purposes, consumers also used it for essentially every part of their lives.

Things they used to go outside for, such as shopping, business meetings, even doctor visits, they could now do from their home using their computers and smartphones. As a result of shifting consumer behavior, advertisers spent more on ads for social media platforms to try to capture more attention.

As this occurred, Snap’s stock price kept rising on anticipation of strong growth ahead. Indeed, by the second quarter of 2021, revenue growth did jump by 116%, by far the highest it had been in four years, sparking a rally that saw the stock price surge over $80 at one point.

In the 18 months between March 2020 and September 2021, the stock had gone up by almost eight-fold. In general, FOMO (the fear of missing out) sparked a buying fervor, and drove many tech stocks to unreasonably high valuations.

Back to a Dud

For Snap, though, the good times didn’t last long. When compared to the strong benchmarks of 2021, the growth rates slowed dramatically. After all, it’s much easier to go from, say, $50 million to $100 million (100% growth) than to go from $100 million to $200 million (also 100%).

The company simply could not sustain the high growth rates reached during the pandemic. Revenue growth has decelerated in seven straight quarters and in fact was negative in the latest reported quarter.

It doesn’t help that the company has only been (barely) profitable in one quarter, and profitability looks unlikely for the foreseeable future. The stock price is now around $10, even lower than its pre-pandemic levels. At this point, a buy out may be shareholders’ best chance for a quick bump in the stock.

Distinguish Between Trading and Investing

So what lessons can we learn from SNAP’s rise and fall?

It’s clear that optimism can drive a stock sky-high in the short term, but ultimately, the quality of the company matters. If a stock price is being propped up by lofty expectations, it’s at risk of a big drop if reality doesn’t match expectations. The higher the expectation, the easier it is to miss.

Moreover, although SNAP has been a terrible stock overall, it was still possible to make quite a bit of money, if you timed the trades correctly and didn’t hold your position for long.

Put another way, a speculative and volatile stock like SNAP is not a great fit as a long-term investment. You are better off treating it as a trading stock, and getting in and out quickly. You could even use options to increase your leverage.

Editor’s Note: The stock market has been on a tear lately, but if you’re still nervous about risk, consider the time-proven advice of our colleague, Dr. Stephen Leeb.

As chief investment strategist of The Complete Investor, Dr. Leeb has produced a special report on how to survive the tectonic shifts facing the financial world.

Amid the upheavals he sees ahead, he says the most profitable investment opportunity won’t be found among conventional assets. His research indicates it will be a tiny under-the-radar play, as revealed in this report.

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