Snap Inc. (SNAP, Financial) has lost nearly 45% of its value since reaching its all-time high soon after its initial public offering (IPO) in March. The company had one of the biggest IPOs this year, but its future is becoming increasingly uncertain with each passing quarter.
Snap reported disappointing second-quarter results on Aug. 10. For the quarter, the social media company logged a loss of 16 cents per share, missing the analysts' estimates by two cents. Its GAAP net loss increased from $116 million to $443 million throughout that period. This was primarily due to stock-based compensation expenditures, which consumed more than 130% of its overall revenues.
Its revenue came in at $181.67 million, again missing the consensus by $5 million. Although that figure represents a year-over-year surge of 153%, it is down sequentially 133% compared to the first quarter. On the other hand, its daily active users were 173 million, 2.2 million lower than expected. The social media company added just 7 million daily active users during the second quarter, down from the 8 million added in the first quarter.
Source: Statista.com
Snap’s average revenue per user (ARPU) fell short of projections at $1.05. What’s more shocking is ARPU failed to exceed the levels of the fourth quarter. The company’s management said it was mainly due to seasonality, but a company in its early stages of monetization should not be suffering such substantial seasonality.
Apart from this, the company’s sales and marketing expenses continue to grow at a strong rate. In the most recent quarter, its sales and marketing expenses escalated to 50%, a surge of 16% year over year. The company’s profitability depends on its ability to leverage its operating expenses.
Snap contines to heavily invest in research and development in order to effectively compete with its rivals. The social media company recently introduced its self-serve platform for Snapchat buyers, which enables advertisers to buy ads themselves. In contrast, this new ad buying platform also lowered average ad prices.
For the time being, operating leverage will have to emanate from sales and marketing. The self-serve platform is key to that.
Unlike Twitter (TWTR, Financial) and Facebook (FB, Financial), Snapchat relies on expensive third-party hosting. The company’s gross margin currently sits at just 16.25%, considerably lower than its competitors.
Summing up
Snap’s stock price continues its rapid decline and it appears the company will not stop bleeding anytime soon. Furthermore, its path to profitability is uncertain.
Despite reporting triple-digit growth in revenue and double-digit growth in daily active users in the second quarter, the social media company has struggled to meet the high bar of constant growth. As a result, shares of Snap were down 14% the day it reported second-quarter results.
There are other concerns regarding its financial discipline, long-term growth plans and its ability to compete effectively with social media giant Facebook. The social media company currently has a negative free cash flow of $229 million, which will prevent it from investing generously in its future growth.
Snap needs a lot of money to counter Facebook, which has added several similar features as Snapchat. Its daily active users are also growing at a sluggish rate, which is obviously a bad sign for a social media company. In contrast, Facebook continues to grow and reached 2 billion monthly active users in June.
As a result, investors looking to profit from the social media space should stay away from Snap and consider buying Facebook instead.
Disclosure: No positions in the stocks mentioned in this article.
