Is there still Hope for Snap?

The excitement for shareholders of Snap came in the form of the company’s second-quarter report. While many were expecting Snap to post yet another disappointing quarter, it did just the opposite, beating Wall Street’s expectations on both the top and bottom lines. Investors seemed gleeful, bidding the company’s stock up as much as 13% in after-hours trading.

But then they tuned into the company’s conference call, and the excitement quickly wore off. Tim Stone, Snap’s new chief financial officer, warned of slowing revenue growth in the third quarter. He also implied that the company’s daily active users would decline again in the period after dropping for the first time ever in the second quarter.

Shareholder enthusiasm soon turned to frustration, and the stock soon erased all of its earlier gains and fell to as much as 6% below its price at the close of regular trading.

But even that passion didn’t last long. By the time the call ended Snap’s stock was essentially back to its regular trading close. It was almost as if stockholders had moved past that brief moment of exuberance and just accepted Snap for what it is.

Downhill for Snap

And what Snap is starting to look like is a passing fad and a rapidly maturing company. It’s not the next Facebook. Instead, it’s starting to look like Twitter, the social-media company whose growth famously stalled out long before anyone expected it would. The big question for Snap investors is whether the company will be able to start delivering profits before its growth completely stalls.

That Snap is quickly losing momentum is undeniable. In the first quarter last year, its number of daily active users (DAUs) was growing at a 36% annual clip. The growth rate has fallen repeatedly since then. In the just-completed period, Snap’s DAUs grew just 8% from the second quarter last year.

Worse, its daily user count actually fell from the first quarter this year. And not just because it lost favour in one country. In fact, the company saw its DAUs decline in all three of its major geographic operating areas — North America, Europe, and the rest of the world. That’s not a good sign for what is supposed to be the answer to Facebook for Millennials and Generation Z.

Slow Snap Growth

Unlike its user base, Snap revenue is still growing. In fact, its sales grew at a 44% annual clip in the second quarter. But there too, the company’s results gave reason to worry.

That’s because Snap’s revenue growth has been quickly decelerating. In the first quarter of last year, the company nearly quadrupled its sales from the year-prior period. In the fourth quarter of last year, its revenue was still growing at a 72% annual pace. But it’s fallen consistently since then.

And Stone said its growth rate will decline even further in the third quarter. Indeed, the company is forecasting that its third quarter revenue growth could be as low as 27% in the period.

The company has been in the middle of a big move to so-called programmatic advertising, which essentially automates the process of placing ads and can be used to help fill previously unused ad inventory. The problem for Snap is that along with that move it’s seen a consistent decline in what it can charge for its ads.

What’s potentially most problematic for Snap is that even as its growth slows, it still hasn’t gotten a handle on its costs. Yes, it cut back on its administrative costs and its research and development spending, leading to a lower loss and a reduction in the outflow of operating cash, but that’s not the whole story.

Lindsay has over 8 years of experience in the business and finance industry. She is a MBA and a journalist by education and did her internship at a major local newspaper in Texas slowly climbing the ladder to reach the higher echelons as editor of various online news portals before joining Business Magazine.

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