Is Snap Doomed to Disappoint?

Problems with declining user base and privacy regulations may prove insurmountable

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Aug 15, 2018
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The social media business is starting to get crowded. And, when the essential business revenue model between competitors is essentially the same, developing and maintaining a robust user base to satisfy investors is becoming more difficult. Fickle social media customers, particularly younger users, may find it increasingly difficult to remain on one platform long term when there are other alternate platforms available.

As if to confirm this rather austere scenario, Snap Inc. (SNAP, Financial), the parent company of the Snap platform, is the latest social media company to report disappointing results. The company reported a 2% drop in daily users, its first quarterly decline since its founding in 2011. This bad news comes on top of its prior quarter, when the company’s user base grew a paltry 2.14%, a far cry from its double-digit growth of two years ago.

However, misery loves company. Although it may be scant consolation for the company’s investors, Snap’s results were reported less than two weeks after Twitter (TWTR, Financial), and Facebook (FB, Financial), the other two big players in the social media sector, reported slower user growth as well, causing Facebook’s stock to plummet more than 20% in one day

The harsh reality is that the social media environment has become crowded in terms of several platforms vying for the same advertising dollars. When Snap went public, none of the data harvesting abuses were publicly known. Once they were disclosed, regulatory intervention was imminent. To their great misfortune, none of the social media companies, including Snap, had planned for this unforeseen but significant factor.

The perilous waters all social media platforms must now navigate is determining the proper and revenue-maximizing balance between user privacy (much of which will be addressed by regulations) and growing a user base to garner sufficient advertising revenue. Facebook has recently indicated that this balancing act is going to be more difficult to perform than was originally anticipated.

Although Snap hopes partnering with applications developers to add new features will help it entice new users, investors have heard this tale before. Snap’s response to the growth/privacy protection dilemma now faced by all social media businesses, is nothing more than old wine in new bottles.

Its plans to enhance revenue mimics Facebook’s original business model, but with no acknowledgment of how or in what manner its ability to pursue such a strategic plan will be circumscribed by impending and existing (GDPR) regulatory provisions enacted in order to protect users' privacy.

Indeed, it was a similar partnering between Facebook and software developers that landed the company in hot water as it was unable to disclose to whom user information was transferred and what the third party then did with that information. Snap will have to be vigilant in order to avoid such complications or problems in the future.

For Snap, monetizing its platform within these constraints is going to be increasingly challenging and perhaps ultimately insurmountable.

Will Snap limit the amount of user data it shares with third-party developers as Facebook was forced to? Although Snap claims that its developed platform was designed with these safeguards in mind, it remains to be seen exactly how it will be able to attract more users sufficiently to keep investors happy.

Although the company’s second quarter revenue increased by 44% from the previous period last year, these numbers are misleading. The “improvement” is somewhat illusory, as it is all attributable to the fact that its losses had merely decreased from $353 million for the latest quarter compared to a $443 million loss the previous year. According to FactSet, the street consensus is for Snap to post a loss of 31 cents a share.

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An additional disadvantage for Snap is that its user base may prove to be evanescent, as the platform’s structure is designed for fleeting user interactions, substantially different than the more in-depth experience that Facebook or Twitter offers.

I have no position in any of the securities referenced in this article