Snapchat parent company Snap Inc. (SNAP, Financial) reported its third-quarter earnings after the market closed Nov. 7.
The California-based social media company posted an earnings loss of 14 cents per share, beating the expected loss of 15 cents per share. Revenue of $207.9 million missed expectations of $236.9 million but increased 62% from the prior-year quarter.
In addition, the company added 4.5 million new users, bringing its total daily active users to 178 million. The market expected 181.8 million DAUs. CEO Evan Spiegel said the DAUs grew “at a lower rate than we would have liked.”
According to Kevin Kleinman, founder of WatchHimTrade.com, Snap needs to grow its user base in order to become profitable.
“With user growth slowing, they cannot charge the premium for adÂ
space that they were charging one to two years ago,” Kleinman said. “To reaccelerate user growth, they should focus more on live events through media and celebrity partnerships.”
The trend in the company’s revenue growth is illustrated in the graph below.
Following the announcement, shares plummeted more than 16% in after-hours trading.
Chief Financial Officer Drew Vollero said the company’s earnings were impacted by a $39.9 million write-down as a result of losses from its unsold Spectacles, which was the company’s first venture into hardware. The charges were due to excess inventory and inventory purchase commitment cancellations.
“Moving forward, we will continue to be in the marketplace with Spectacles and expect modest revenue from the product line,” Vollero said.
Snap said advertising revenue grew 59% year over year to $204 million. While Imran Khan, chief strategy officer, said this is healthy growth, the company is working to grow revenue even faster. He highlighted several factors the company believes will help achieve this goal, including transitioning the Snap Ads business to self-serve, accommodating the needs of its advertisers and making the Sponsor Creative Tools more accessible.
Despite average revenue per user (ARPU) growing 39% to $1.17, it fell below estimates of $1.30.
During the earnings call, Spiegel also revealed the company is redesigning its app to make it easier to use.
“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term,” Spiegel warned, “and we don’t yet know how the behavior of our community will change when they begin to use our updated application. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”
CJ DeGuara, media and digital marketing specialist at IPOP Network, a Florida-based marketing and advertising company, said it is crucial the company adapts without losing its core audience, especially as they get older.Ă‚
Of the gurus invested in Snap, Frank Sands (Trades, Portfolio) has the largest holding with 1.27% of outstanding shares. Steve Mandel (Trades, Portfolio), George Soros (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Paulson (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Ron Baron (Trades, Portfolio) also have positions in the stock.
With a market cap of $16.4 billion, Snap was trading around $13.10 on Wednesday with a price-book (P/B) ratio of 4.56 and a price-sales (P/S) ratio of 44.91. According to GuruFocus data, the stock has lost approximately 11% since its initial public offering in March.
Disclosure: I do not own any stocks mentioned.
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