Snap Stock Snaps Back – for the Moment

Snap shares appear to have rebounded from the plunge they took earlier this month, after the newly public company released a massive US$2.2 billion loss in the first quarter, but investors still are scratching their heads over the company’s prospects.

Trading just over $20 at mid-day Tuesday, Snap looks to some like it has regained its early bloom. Others suspect that darker days are yet to come, as signs of robust growth have been lacking.

Snap’s revenue and subscriber growth figures missed consensus estimates in its first quarter, sending shares down to a low of $17.59.

Revenue rose sharply to $149.6 million in the quarter, compared with $38.8 million in the year-earlier period, but still fell short of consensus estimates of $158 million.

Investors also were spooked by slow growth in daily active users, which totaled 166 million in the quarter, compared with 122 million in the year-ago quarter, a 36 percent gain. DAUs increased by a slim 5 percent from the 4th quarter of 2016. A “DAU” is defined as a registered Snapchat user who opens the app at least once during a defined 24-hour period.

Average revenue per user rose 181 percent to 90 cents during the first quarter, compared with 32 cents a year earlier. ARPU was down 14 percent from fourth-quarter 2016 figures, when ARPU was $1.05.

Snap’s Progress

During the conference call with analysts, CEO Evan Spiegel said the company was pleased with Snap highlighted its gains in engagement during the quarter. Users created 3 billion Snaps daily, noted CEO Evan Spiegel.

The company made strong inroads with Android users, who comprised 30 percent of net additional users compared with 20 percent in the previous quarter.

Users spent an average of 30 minutes a day on Snapchat, according to Chief Strategy Officer Imran Khan, who pointed to a Nielsen report indicating that 45 percent of 18-34-year-olds interacted with Snapchat on any given day.

Although, most of Snap’s first-quarter losses were attributable to one-time stock compensation, analysts nevertheless remain concerned about the company’s user growth and engagement metrics.

Challenges Ahead

“The underlying numbers do present a mixed picture for Snap, highlighting some clear challenges,” Jack Kent, IHS Markit director, operators and mobile media, said following the company’s earnings report.

“The slowing user growth rate is an indication that Snap is already well penetrated among its main youth audience in core Western markets, and so will have to adapt to broaden its user base either internationally or in new demographic segments,” he told the E-Commerce Times.

Even if Snap gains new user segments, they may not monetize as well as their existing base, Kent warned.

Snap’s stock plunge earlier this month reflects Wall Street’s reluctance to take the long view when it comes to tech stocks, observed Midia Research analyst Zach Fuller.

Growth metrics often define valuations over revenue, he noted.

The fact that they slowed in the face of Snapchat’s fierce competition with Facebook’s Instagram likely spooked investors, Fuller told the E-Commerce Times.

When Snapchat first came on the scene, it was not much different than a dot-com like Twitter, as compared to a viable entity like Facebook, suggested Rob Enderle, principal analyst at the Enderle Group.

“They were popularity first, figure out revenue and profit later,” he recalled.

“That was the problem with the old dot-coms — no real business plan, just the idea for a free product, which exposes the firm to emulation by someone that can better monetize the effort, like Facebook,” Enderle told the E-Commerce Times. “Snapchat and Twitter are the poster children for this at the moment.”

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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