Snap Inc: from Bad to Worse

Snap Inc [NYSE:SNAP]. It was billed as the next big tech stock that had investors frothing. The next Facebook Inc [NASDAQ:FB], or Google.

The hype surrounding the IPO was huge. And for good reason; snapchat was popular. Just ask any teenager or 20-something. But it had its doubters, like any stock.

Early investors got what looked like a killer deal. US$17 a share for a company that could be worth hundreds of billions. They dismissed the doubters and looked set to cash in. At least for a couple of days…

Snap’s share price raced out of the gates, trading around the US$24–$27 mark in its first few days. Then it cooled off a little. Fine, nothing out of the ordinary just yet, the market just got a little excited.

It dipped to US$19.54 just over a fortnight after listing. But then it rallied — phew.

It was back up, this time around the US$22 mark. Then it started slipping again, and on it went, never really recovering since. The doubters had got it right, and Snap continues to flail about with poor performance.

It’s been a rough year for the company and for shareholders. It could get worse before it gets better. The earnings report is in and, well, things aren’t looking good…

Snap back to reality

Today the company has suffered another massive blow. In afterhours trading the stock wiped 21% off its share price after they released their third quarter earnings. And while they managed to bring in US$207 million in revenue, up 62% from this time last year, the losses were far greater.

The company’s cash-burn rate was grim. They lost $443 million in the third quarter, almost quadruple the amount they spent in the same quarter in 2016. With a good chunk of that being written off from their failed Spectacles product. A pair of glasses that had camera’s built into the frames.

What is perhaps even more troubling for the company though, is that they aren’t growing fast enough. Snap only brought in 4.5 million new users in the third quarter, 2 million short of analyst forecasts. Resulting in 2.9% user growth over the quarter, the lowest ever for the company.

It probably isn’t as shocking for those who have been following the company. Snapchat fell out of the iOS top 10 apps for the first time this year in the third quarter. Though that’s being attributed to growth from competitors rather than Snapchat’s failure.

Perhaps it’s a bit of both. Either way, it’s not helping Snap’s share price.

Snap also just lost their senior vice president of engineering, Tim Sehn, this week. Sehn joined in 2013 and worked on all of the company’s engineering efforts to date.

Maybe it’s for the best, maybe it’s an utter disaster. It’s something that we will only be able to tell in time. But the fact that it was announced the day before the earnings were released, signals to me that the results may have at least influenced his decision. 

Time for change

The company is certainly going through some tough changes. Losing your senior engineer seems rather drastic. Still, it might be the change that the company needs. Because this is a company that needs change.

As Business Insider so eloquently puts it:

When is signing on five-times as many advertisers as you had at the start of a quarter a bad thing? When most of them are cheapskates, and you’ve billed your platform as a premium, TV advertising substitute.

Herein lies the real problem. Snap’s advertising rates are down 60% year over year. The poor user growth may have put them up a certain creek. But the reduced ad spend has left them without a paddle.

Snapchat is blaming the advertisers. Stating that advertisers were buying more programmatic ads, which is diluting prices. Essentially, software was buying ad space as opposed to a person. Turns out you can’t use a sales pitch on software. Sorry Snap.

Honestly I just think Snap has had some poor direction, or leadership — or both. I mean, Snap’s early pitch to advertisers was trying to make it out that it was the new TV. Basically they were saying that for young people, a mobile phone was their generation’s TV.

Now I’m sorry, but I studied advertising and marketing at university and that doesn’t seem right. The first thing I learnt was that digital ad spend is set to overtake TV. In fact one study suggests digital spending will overtake TV this year.

So in my view that was an awful pitch. But anyway, I’ll give them the benefit of the doubt on this one.

What I can’t forgive though is the fact that they didn’t recognise programmatic advertising as a threat. You’re a tech start-up for crying out loud Snap. You literally operate in the industry that is known for disruption through technology.

You’re telling me no one working at your company could see that disruption was coming to the ad industry? Because that tells me your leadership is out of touch.

Snapchat is now getting an overhaul and is being redesigned to make it more user-friendly. I get it, they want to grow their user base. But I think the bigger problem is their monetisation. I think Snap needs to try to get more money out of their existing users before bringing in new ones.

Who knows, maybe I’m wrong. But Snap needs a solution, and quickly.


Ryan Clarkson-Ledward,
Contributing Editor, Money Morning

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks by dissecting the latest events affecting the world.

To find out more about the publications Ryan works on and how you can subscribe, please click on the corresponding link here:

Money Morning Australia