Snapchat is stalling out, and there's not much hope that it'll get back on track
- Snap's quarterly report Tuesday showed how the company is rapidly maturing.
- It's losing users, revenue growth is slowing markedly, and things look like they'll only get worse from here.
- That's bad news for investors who have already had to endure a stock that's below its public offering price and repeated disappointments from the company.
For a little bit on Tuesday, Snap investors thought they had something to cheer about.
Then reality hit, and they collectively seemed to collectively realize they may be holding the next Twitter - a stock that carried a lot of hype at IPO, but which never seemed to live up to its full potential. Which, upon further reflection, doesn't seem to have been all that different from what they thought about the company before.
The excitement for shareholders came in the form of the company's second-quarter report. While many were expecting Snap to post yet another disappointing quarter, it did just the opposite, beating Wall Street's expectations on both the top and bottom lines. Investors seemed gleeful, bidding the company's stock up as much as 13% in after-hours trading.
But then they tuned into the company's conference call, and the excitement quickly wore off. Tim Stone, Snap's new chief financial officer, warned of slowing revenue growth in the third quarter. He also implied that the company's daily active users would decline again in the period after dropping for the first time ever in the second quarter.
Shareholder enthusiasm soon turned to frustration, and the stock soon erased all of its earlier gains and fell to as much as 6% below its price at the close of regular trading.
But even that passion didn't last long. By the time the call ended Snap's stock was essentially back to its regular trading close. It was almost as if stockholders had moved past that brief moment of exuberance and just accepted Snap for what it is.
Snap is looking like a passing fad
And what Snap is starting to look like is a passing fad and a rapidly maturing company. It's not the next Facebook. Instead, it's starting to look like Twitter, the social-media company whose growth famously stalled out long before anyone expected it would. The big question for Snap investors is whether the company will be able to start delivering profits before its growth completely stalls.
That Snap is quickly losing momentum is undeniable. In the first quarter last year, its number of daily active users (DAUs) was growing at a 36% annual clip. The growth rate has fallen repeatedly since then. In the just-completed period, Snap's DAUs grew just 8% from the second quarter last year.
Worse, its daily user count actually fell from the first quarter this year. And not just because it lost favor in one country. In fact, the company saw its DAUs decline in all three of its major geographic operating areas - North America, Europe, and the rest of the world. That's not a good sign for what is supposed to be the answer to Facebook for Millennials and Generation Z.
Stone warned things will get even worse in the current quarter. He declined to give any forecast for DAUs for the period, but did note that the company's third-quarter user growth rates tend to be slower than its second-quarter ones both on an annual and a sequential basis. That implies that DAUs will drop by even more than 1.6% they declined from the first to the second quarter.
In his prepared remarks on the call, Snap CEO Evan Spiegel blamed the decline on the company's disastrous redesign, which was widely panned by uses. But as even he noted, the company released that redesign nearly six months ago and has been working ever since to address user complaints. That the company is expecting its user base to fall even farther and even faster in the months ahead suggests there's something more going on than just people being upset about app changes.
Snap's revenue is growing - but not as much
Unlike its user base, Snap revenue is still growing. In fact, its sales grew at a 44% annual clip in the second quarter. But there too, the company's results gave reason to worry.
That's because Snap's revenue growth has been quickly decelerating. In the first quarter of last year, the company nearly quadrupled its sales from the year-prior period. In the fourth quarter of last year, its revenue was still growing at a 72% annual pace. But it's fallen consistently since then.
And Stone said its growth rate will decline even further in the third quarter. Indeed, the company is forecasting that its third quarter revenue growth could be as low as 27% in the period.
The company has been in the middle of a big move to so-called programmatic advertising, which essentially automates the process of placing ads and can be used to help fill previously unused ad inventory. The problem for Snap is that along with that move it's seen a consistent decline in what it can charge for its ads.
The prices it can charge advertisers has fallen every quarter since it became a public company and they fell again in the most recent period. The amount it charges for programmatic ads fell 9% from just the first quarter and 29% on an annual basis.
Snap has repeatedly tried to assure investors that its bet on programmatic ads will pay off in the "long run" with higher prices, but so far that bet has been a loser. And the declining prices mean that it has show users more and more ads to increase its revenue - something that could be playing into the user decline.
What's potentially most problematic for Snap is that even as its growth slows, it still hasn't gotten a handle on its costs. Yes, it cut back on its administrative costs and its research and development spending, leading to a lower loss and a reduction in the outflow of operating cash, but that's not the whole story.
It's still bleeding lots of cash
When you factor in capital expenditures - much of which is related to its move to new offices - Snap's actual outflow of cash actually increased. Its free cash flow - the cash generated by or used up in operations less capital expenditures - was a negative $234 million, up from $229 million a year ago.
Just as a comparison, the company's revenues were only $262 million in the second quarter. At that rate of red ink, Snap will run out of cash in less than two years.
Maybe Spiegel, Stone, and company will figure things out before then and jump start the company - or at least stem its losses. For now though, the thrill Snap once offered investors seems to be gone.