It is no secret Snap Inc. (SNAP, Financial) has had a rough go of its first year as a public company. I have written already about the inadequacy of the company’s leadership and its deteriorating competitive position. Things have only gotten worse since I last covered Snap, and it does not look like they will be getting better anytime soon.
Poor user growth, sluggish sales and departures of key staff make the picture look grim. But that is not all: Snap has apparently developed a siege mentality, with teams and individuals balkanized in an environment of mounting paranoia. Putting it all together, we get the sense this is a company without any coherent direction, let alone a plan for exiting the punishing cycle of underperformance and slipping share price that has plagued Snap since it made its ill-judged initial public offering.
Let’s take a look at the developing picture at Snap, and see if there is any hope for the erstwhile social media darling.
Outlook keeps deteriorating
The latest news to wrack Snap investors hit this month, when the company announced a raft of layoffs in the face of slow user and engagement growth on its Snapchat platform. Snapchat user growth and advertising have failed to maintain the pace of competitors such as Facebook’s (FB, Financial) Instagram, which has been making significant inroads into Snapchat’s home turf.
In light of Instagram’s growth and popularity, the Snap bull thesis has been that the two platforms can coexist and not cannibalize each other. Evidently, Facebook did not get that memo. Snap is starting to look an awful lot like MySpace, which Facebook obliterated to become the top dog of social media, without any particular advantage on which it can rely. That realization has clearly begun to dawn on a range of analysts; the company was hit by a battery of downgrades after its November earnings call and more analysts have followed suit in recent weeks. With Instagram user engagement and growth crushing Snapchat’s, things look set to get worse.
Despite the negativity, shares have managed to climb from their sub-$12.50 lows in November to $14.25 at the close on Jan. 22. After a modest rally over the past few days, Snap is down almost 3% so far this year. The stock is still down more than 40% from its IPO and, while it has arrested its precipitous fall for now, the pain looks to be far from over.
Siege mentality takes hold
Snap’s leadership has evidently succumbed to paranoia in the face of deteriorating performance and questions surrounding the value of Snapchat redesign, with communication heavily restricted and teams isolated from one another. As the Daily Beast reports on the situation at Snapchat HQ:
“Aside from an elite group of engineers and those in Snapchat CEO Evan Spiegel’s inner circle, most employees aren’t given access to the version of the app where its newest features are tested and deployed. This leaves some employees feeling left out.”
Evidently, employees are becoming ever more disenchanted with the company, with many looking for the exit. That incentive is understandable, given Snap’s unusual corporate culture. The collegial, happy-hipster environment one usually associates with a tech startup is completely absent. Instead, fear and paranoia reign supreme. Even the company Christmas party was tainted by the siege mentality, with employees forbidden from using Snapchat during the event.
Furthermore, the much ballyhooed app redesign, which Snap hopes will lift its fortunes from the ashes, does not appear likely to do so. Available user data – and several voices within the company itself – suggest the redesign will not deliver the company from its current turmoil.
Verdict
Faced with relentless competition, stagnating user growth and weak ad revenues, there is no path to profitability in sight. It has fallen far, but the pain is likely not over for this beleaguered tech company. The only credible hope comes from the possibility of a buyout. The decision to go public instead of taking a generous buyout offer from Facebook looks ever more foolish. Investors should steer clear.
Disclosure: I/We own no stocks mentioned in this article.
