While You Were Sleeping, Snapchat Lost $6 Billion In Value

The Writing On The Wall: Snap Loses $6 Billion Overnight

Snap CEO Evan Spiegel (photo: TechCrunch, CC by 2.0)

Snapchat’s parent company proves that building a business model around live filters with dog noses (oh, and some messaging features, too) doesn’t turn a profit.  Maybe having an actual business plan might help.

So, how exactly do you lose $6 billion overnight?

Simple.  You focus a business model on a messaging service that includes features used (read: copied) by your competitors.  Then, you don’t innovate.

Next, you plan for an IPO without a clear (and profitable) business model.  Oh, and you also post a $2.2 billion net loss in the first quarterly report following your IPO.

Now, following a poor financial report, investors are fleeing Snap.

On top of that, Snapchat is also facing a rapid deceleration of user growth.  So how did the “promising” messaging service get here?

On Wednesday, Snapchat’s parent company posted a dismal Q1 2017 report.  Snap reported $149.65 million in revenue.  This is a huge jump over the same period last year, when the company posted $38.8 million in revenue.  Sounds good, right?  Unfortunately, working towards their IPO without an actual business plan appears to have backfired for the company.

Snap just reported a net loss of $2.2 billion, compared to ‘just’ $104.58 million for the first quarter of 2016.

Why the huge losses?  In a few words, stock-based compensation.  Proving that working towards an IPO can be a wise move (for one person, at least), $750 million went to CEO Evan Spiegel.  He received the “bonus” for taking the company public.  Operating expenses were also $196 million.

Analysts had expected $158 million in revenue.  Yet, the company’s first quarter financials proved horrifying to investors.  In after-hours trading, Snap’s shares experienced a 23% nosedive.

This means that the company lost nearly $6 billion overnight.

Adding to Snap’s woes (and proving that no, live puppy nose filters aren’t a profitable business model), average revenue per user declined 14% in the last quarter alone.  Instead of posting huge daily active user (DAU) numbers, Snapchat only added 8 million users.  This number jumped 36% year-over-year, yet only saw a modest (read: disappointing) 5% increase from the prior quarter.  To sum up these numbers, Snapchat experienced its slowest user growth pace in years.

Spiegel & co. clearly weren’t ready for Wall Street.  They missed out on the three most-watched metrics: user growth, earnings, and revenue.

This news doesn’t come as a surprise.  Up against Facebook’s popular Instagram, Snapchat has seen flatlining numbers.  Shortly after the introduction of Instagram Stories (an outright clone of Snapchat Stories) last August, Snapchat’s DAU numbers became stagnant.

Snap didn’t pay attention to the warning signs.  Instead, they attributed flatlining numbers to a lack of “product innovation” (read: they didn’t have a suitable reply to Instagram Stories).  An image posted by TechCrunch painted the picture that Snap CEO Evan Spiegel & co. outright ignored.

Image by TechCrunch

The numbers led Spiegel to admit that the company faced “significant competition in almost every aspect of [its] business both domestically and internationally.”  Yet, underestimating the social networking juggernaut has proved to be a costly mistake for the company.

Despite the overnight $6 billion market devaluation, some investors remained bullish on the company’s shares.  Morgan Stanley, a leading global financial services firm, said,

“Bigger picture, little has changed from the thesis at the IPO… as Snap’s success going forward, in our view, will come down to its ability to continue innovating and improving its user offerings, engagement and ad product suite. There are steps in motion and signs of progress.”

Goldman Sachs also remained bullish on the stock.

While SNAP remains a near venture stage investment with all of the risks that implies, we continue to believe its audience and engagement represent a unique asset that will benefit from growth and diversification of internet usage and advertiser adoption as both mature. Therefore, we remain Buy rated.

While most investment firms remained bullish, others broke against the ranks. Pivotal Research wrote,

“Snap reported light 1Q17 earnings, representing a decline in revenues vs. 4Q16, which while consistent with the company’s prior guidance, nonetheless represents a surprising element of seasonality in the business, and risks of less growth ahead than we previously expected. We are modifying our model with a new $9 per share price target on a YE2017 basis. We continue to rate the stock Sell.”

Nomura agreed, though it posted a higher price target.

Some had thought SNAP’s initial quarters of monetization would follow more of a benign path given the potential for marketers to put experimental ad budgets to work on an app with a heavily engaged millennial user base, but YoY ad revenue/ARPU growth rates decelerated substantially once again, just as they did in the quarters leading up to the IPO. Revenue growth estimates will come down in our model, and as such, we maintain our Reduce rating and lower our Target Price to $14.

So, what’s next for the company?

As Snap continues to admittedly face fierce competition, it must find a way to survive.  Snapchat will have to introduce unique, key features to gain more users (and actually keep them).  The company must also discover substantial growth opportunities.

Will Snap pull it off?

MoffettNathanson’s Michael Nathanson doesn’t think so.  He sees the Q1 2017 results as the writing on the wall.

“[The rapid deceleration in user growth] confirms our view that Snap is highly penetrated amongst its core target demos and will hit a ceiling on [daily active user] growth sooner than the stock is pricing in.”