Here's a message that, ironically, might linger in Wall Street minds for a while: Snap Inc., parent company of the popular Snapchat social media app, has missed financial analyst expectations for the second quarter in a row, heralding a 13% decline in its share price to $11.93.
That's not a good trend for a company that has only reported two quarters of financials as a public company, having joined the New York Stock Exchange in March this year with a stock price of $17. (See Snap, Crackle & Pop: $28B IPO Stokes 'Bubble' Fears.)
Of most concern for analysts is Snap's user base growth. In the second quarter, Snap added 7.3 million new daily active users, a long way short of the expected 10 million. Revenues also fell short at $181.7 million -- $189 million was expected. And the company's net loss grew to $443 million, compared with $116 million for the same quarter last year.
However, Snap more than doubled its annual revenue per user from $0.50 a year ago to $1.05 for this quarter. Snap executives stressed that they can grow the company by increasing per user revenue rather than targeting high user growth. The company ended the second quarter with 173 million daily active users (DAUs).
Jeffries analyst Brian Fitzgerald maintained his buy rating on the stock, saying that even though "near-term issues hang on the stock," his firm encourages investors to "look through the noise at the long-term opportunity."
Fitzgerald expects pricing for Snapchat to be weak in the near-term, as the company focuses on bringing new advertisers on-board. He's also concerned about potential price pressure on the stock, as employees are now able to sell shares for the first time since the IPO. However, both founders, Evan Spiegel and Bobby Murphy, have said they will not sell any of their stock this year.
Fitzgerald is also frustrated with Snap's unwillingness to offer guidance to analysts, saying this adds "unneeded uncertainty" to the company's results.
BTIG Research's Rich Greenfield had a slightly different take in a video interview with Business Insider. According to him, Snap is under siege from Facebook, now that the latter has recognized the threat that Snapchat poses. He said Snapchat's survival depends on innovation, and whether the team could out-innovate Facebook through "awesome value-creation."
Greenfield cited Snapchat Stories as an example, pointing out that it took Facebook three years to come up with something equivalent. But he also agreed that Instagram Stories, Facebook's response, was now up to 250 million DAUs and has just "blown past Snapchat" since its launch.
That's why Greenfield is still cautious about Snapchat's "still very high valuation," citing his neutral rating on the stock.
But Jeffries' Fitzgerald argues that Snap still has significant long-term potential, as there is a real chance to target opportunities in mobile advertising, even as advertisers "yearn for a third independent player" in mobile. He stressed that engagement remains robust: Snapchat users create an average of more than 20 "snaps" per day, with under-25 users spending more than 40 minutes a day in the app. He also believes mobile advertising is under-represented, given the time spent with the medium and so believes Snap is well positioned to benefit from growth over time.
Snap management highlighted a couple of initiatives the company is optimistic about. Firstly, stories from its Discover partners boosted viewership 30% over the quarter. CEO Spiegel also plugged the success of the company’s own programming, with its dating show, Phone Swap, picking up more than 10 million viewers per episode and now being prepared for TV distribution. The company also won an Emmy nomination for The Voice.
Spiegel also said that 250 million snaps are saved to Snapchat's Memories feature, which allows users to save photos and videos that would otherwise expire. He expects this will be an important part of the Snapchat experience in the future.
But it's the Snapchat Discover platform, and the company's ability to develop new and engaging programming for it, that will decide the company's future performance -- especially with Facebook also targeting this opportunity. (See Facebook Flexes Its Video Muscle With Launch of 'Watch'.)
Snapchat has focused almost exclusively on unscripted reality or news shows typically following celebrities, artists or musicians behind-the-scenes. This fits in with the innate experience-sharing nature of Snapchat, which is all about users showcasing their lives.
This genre appears to be working for the company. Snapchat's most successful show, Phone Swap averaged more than 10 million viewers per episode. Second Chance, a show featuring ex-boyfriends and girlfriends, averaged 8 million viewers while The Rundown, an entertainment news show from the E! channel, brings in 8 million viewers per episode on average.
This is attracting advertiser interest as well. For example, hotel chain Marriott used Snapchat Discover to run three-minute episodes of a show entitled Six Days, Seven Nights, a travel show featuring celebrity experiences on the road.
The company has launched 22 shows in less than a year, and it plans to offer still more by the end of the year. Comedies and animated shows are also expected, but the company's emphasis is on reality shows -- ideally featuring a celebrity of some sort who will bring along a sizable fan following out of the box.
For now at least, this is likely to be the company's primary strategy for driving revenue growth.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation