May 24, 2017    4 minute read

Snap Will Survive Despite Its Rough First Quarter

Moving up?    May 24, 2017    4 minute read

Snap Will Survive Despite Its Rough First Quarter

Snap reported quarterly financial results for the first time as a public company last week, posting revenue numbers that missed estimates and that showed slower-than-expected user growth.

This poor quarterly performance had an immediate effect on the stock market, and in response, Snap shares had plunged more than 20% through after-hours trading.

The negative news follows concerns related to Facebook and its subsidiaries’ attempts to imitate the app. The user growth for the company over the last four quarters has been 17.2%, 7%, 3.2%, and 5%, respectively, which is a not an exciting pace for a company with 166m in active users.

Cause for Concern?

Snap’s IPO was highly public and as a result had its critics. Most recently, social media rival Facebook and its affiliates (Instagram, Messenger Day, WhatsApp) have displayed an effort to imitate some of Snapchat’s features, launching features such as Instagram stories, disappearing photos, live video, and filters in an attempt to compete with its opposition.

However, Snap’s CEO and co-founder Evan Spiegel has stated that he was unfazed by Facebook’s recent attempts and said: “Just because Yahoo has a search box doesn’t mean they’re Google”.

Nevertheless, investors are concerned that some of Snapchat’s slowdown in growth can be attributed to these imitations. Growth in Snapchat’s user base began to decrease last year after Facebook’s Instagram copied Snapchat’s “stories” feature.

Many analysts seem to agree with the sentiment that Facebook’s imitations are adversely affecting Snap’s growth, suggesting that the increase in Snapchat’s user base last quarter was not strong enough to disprove the notion that Facebook will outpace Snap.

What the Street is Saying

Analysts from all over Wall Street firms have publicly announced their opinions of the company and its expectations. Their sentiments vary, ranging from moving to a disappointing “sell” rating or even increasing their “sell” ratings to “buy”.

Despite that fact that Snapchat’s shares dipped over 20% following its unsatisfactory first earnings report as a public company, Cantor Fitzgerald and Oppenheimer raised their rating on the app, viewing the market’s as overreacting and seeing the price fall as an opportunity to buy low. They attribute the market’s disappointment to Snapchat’s high expectations, rather than systematic issues such as growth.

A few other major firms were less enthusiastic but didn’t seem fazed by the recent news report. Major banks J.P. Morgan and Deutsche Bank maintained kept their respective “hold” and “buy” ratings but both significantly lowered their price targets.

What Does This Mean? 

While this stream of negative news suggests struggles and impending failure for the young company, a combination of history and the app’s potential indicate a turnaround for the firm. Snap’s challenges are not unique, especially amongst tech companies.

Other tech giants have had struggles in their early days. Facebook received early criticism after its IPO report in 2012, reporting a loss in its first quarter and losing having its stock lose almost 40% of its value after two months of being a public company.

On top of that, Snapchat’s revenue has increased over $100m in the past year, establishing it as a growing company. Almost $2bn of Snap’s $2.2bn loss in the January-March period involved stock compensation costs related to the company’s initial offering.

Facebook had similar costs of roughly $1.3bn. The company’s revenue grew from $38.8m in the year-ago period to $150m. More than 3bn Snaps were sent daily in the first quarter, the company said, up from 2.5bn in the third quarter of 2016.

Snap Will Be Okay

It seems possible, and perhaps even probable, that the market is overreacting to Snap’s latest dip. The biggest challenge that the company faces is its slowing growth is userbase. However, this latest stock price dip is a greater reflection of overeager expectations rather than a symbol of the company’s potential failure.

As long as users continue to use Snapchat, the company should continue to see positive results. Snap’s stock price increased approximately 7% in trading on the following Friday, which helped the firm regain some of the value it lost after the earnings report was released.

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