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It Will Take More Than Rainbow Vomit To Turn Around Snap’s Slowing Growth

Snap’s first earnings report since going public didn’t surprise investors, who knew that user growth was slowing due to stiff competition from Instagram.

It Will Take More Than Rainbow Vomit To Turn Around Snap’s Slowing Growth
[Photo: Flickr user Anthony Quintano]

On Wednesday, the parent company of the Snapchat app announced its first earnings since going public three months ago—and it wasn’t pretty. The company reported a loss of $2.2 billion and missed analysts’ estimates almost across the board. The company’s stock, which was heavily talked about and one of the most valuable tech IPOs in recent years, tumbled in after-hours trading. Once $29.44 per share, Wednesday’s earnings report sent shares dropping to $17.27, just .27 more than its initial offering price of $17, and down $1.26 per share from the $18.90/share the stock was at going into Wednesday.

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So, why such a loss? A large part of the $2.2 billion hit that Snapchat took last quarter was expected due to the IPO, which involved awarding $2 billion in stock-based compensation, $750 million of which went to the company’s CEO Evan Spiegel. That wasn’t a huge surprise to investors. The issue seems to lie in the company’s growth, which isn’t happening as fast as investors would like.

Most analysts blame Facebook and the recent launch of Snapchat-like features on Instagram via Instagram Stories and Facebook Messenger. While Snapchat struggles to grow outside of North America, Facebook flourishes, in part due to adjustments the company has made so that its app operates via the mobile web in countries where data isn’t as easy to come by, and speeds are slow.

“Snapchat’s growth is being cannibalized by Instagram Stories in literally every single market in the world,” DJ Kang, SVP of Research at consumer research company ValuePenguin said in a recent report. “Instagram Stories is the ultimate disruptor for Snapchat: when a general-purpose photo & video application (i.e., Instagram) has a good enough functionality (i.e., Stories) to replace a use-specific but high-performance app (i.e., Snapchat), most users will switch to the general-purpose app in order to reduce the “cost” (i.e., time & effort of opening & maintaining multiple apps).”

If you listen to Spiegel, that loss isn’t as big of an issue as you might think. During an earnings call with financial analysts Wednesday, the CEO said that despite what might look like troubling numbers, he’s pleased with how the company is performing, noting that revenue is up 286% from this time last year, and daily active users are up 36%, although that growth is decelerating quickly.

On the earning’s call, Spiegel took a jab at Facebook, saying that the company’s way of “hacking” its way to growth wasn’t sustainable. And just because Facebook has a product that’s similar to Snap’s doesn’t mean that it’s going to win.

“At the end of the day, just because Yahoo has a search box doesn’t mean they’re Google,” Spiegel says, a clumsy metaphor that improbably compares Snap to Google’s position in the search engine wars. “The bottom line is if you want to be a creative company, you got to get comfortable with and basically enjoy the fact that people are going to copy your products if you make great stuff.”

That sentiment is echoed by Forrester Research’s Jessica Liu. “I’m actually not sure why everyone is depicting Snap’s Q1 earnings call as a ‘tremendous loss,'” she told Fast Company via email. “Snap’s user growth is up, although perhaps not as accelerated as Wall Street projected. Q1 advertising revenue typically dips after Q4 due to seasonal advertising spend; this is true for Facebook, Twitter, etc. as well so this should have been no surprise.”

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She adds that the industry should stop comparing Snapchat to Facebook and other social networks. “It’s not a ‘zero sum game’ with social networks,” she says. “If one social network wins, it doesn’t mean that the others automatically lose. Each social network offers a different value proposition. Users fulfill different needs on Facebook vs. Instagram vs. Twitter vs. Snapchat vs. LinkedIn. Snapchat and Facebook can both experience success in today’s world.”

Kang feels differently. After Wednesday’s report, he says that he sees Snapchat’s growth rate becoming even worse in the second quarter because of Instagram, and its stock price continuing to drop, following a similar pattern to Twitter. But Spiegel remains optimistic and even hinted at potential new products coming down the pipeline.

“I think at this point we’re famous for not giving guidance on the product pipeline,” Spiegel said. “Should be a fun rest of the year.”

About the author

Emily is a journalist based in San Francisco.

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