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Snapchat: Fraud or Fortune?

· Snapchat,Social Media,Camera,Glasses,Technology

Snapchat: Fraud or Fortune?

 

 

In March of 2017, Snap Inc., the parent company of social media platform Snapchat and creator of camera glasses Spectacles, went public on the New York Stock Exchange as SNAP, trading at $27 per share. Since then, SNAP’s share price has fallen over 50%. Why has the once-promising social media company performed so poorly, and is there any to money to be made from its stock? The answers to these questions and more can be found by examining Snap Inc.’s past and expected future growth.

 

According to their website, “Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate.” Though Snap Inc. does produce camera glasses Spectacles and has some editing and filter features on Snapchat, at its core, the characterization of Snap Inc. as a camera company is disingenuous. The corporation derives the vast majority of its revenue from Snapchat, a social media platform, via ad revenue and its news tab. As a social media platform, SNAP’s performance is tied directly to the growth in users on Snapchat. [1]

 

Most of SNAP’s poor performance can be attributed to decelerating growth in Snapchat users. In the third quarter of 2017, the number of active daily users of Snapchat grew 2.90%, and in the fourth quarter of that year, that number grew by 5.05%. In the first quarter of 2018, Snapchat only gained 4 million active users, a growth rate of a mere 2.13%. Taken alone, Snapchat’s 187 million users pales in comparison to its competitors. Instagram Stories, which was based on Snapchat’s stories, is used daily by 400 million people, and WhatsApp Status, a similar feature on the popular messaging app WhatsApp, sees over 450 million daily users on average. Slowing user growth and increased competition caused ad revenue to decrease by 31% in the first quarter of 2018. [2]

 

Snap Inc.’s other main source of revenue, camera glasses called Spectacles, have not performed well. Version one of Spectacles was met with low demand, and Snap Inc. had to write of $40 million in unsold parts and inventories in the fourth quarter of 2017. Version two of the glasses has been released, though there is currently no available data on their sales. [3]

 

Slowing growth and lackluster sales have caused negative earnings. Earnings per share in the first quarter of 2018 were -$0.17, compared to estimates of -$0.16. In fact, in each of the four quarters since Snap Inc.’s IPO, the company had earnings of around -$400 million. Snap Inc. has actually had positive gross profits in the last two quarters, but due to high R&D and SG&A costs, Snap Inc. has yet to see positive income, and if it doesn’t soon, SNAP will continue to plummet.

 

Is there room for future growth, or is Snap Inc. doomed to fail? Snapchat must accelerate its average daily user growth if SNAP is to rise in price. Snapchat is still gaining users, but it is not gaining them fast enough. Snap Inc. could mask this problem by growing through the acquisition of smaller companies, as it did when it bought online comic-maker Bitstrips and location-sharing service Zenly and incorporated them into Snapchat. However, this would only be a good investment if it were to raise Snapchat’s user base. Snapchat is reportedly attempting to attract new users by implementing a gaming platform into the app. A similar concept was successful for Chinese messaging app WeChat, but it remains to be seen if it will benefit Snap Inc. in the same way. Despite these efforts, slow growth numbers, low product sales, and shrinking ad revenue make SNAP a risky investment. [4]

 

Written by Jack Vasquez, Edited by Alexander Fleiss

 

[1] Retrieved from http://www.snap.com/en-us/

 

[2] All financial data from Yahoo Finance (accessed June 27, 2018) and the Securities and Exchange Commission

 

[3] Constine, J. (2018, May 11). Snapchat slips in Q1 to its slowest user growth rate ever, shares fall 15%. Retrieved from https://techcrunch.com/2018/05/01/snapchat-q1-2018-earnings/

 

[4] Meyer, D. (2018, June 28). Snapchat Is Reportedly Planning to Follow WeChat By Launching an In-App Gaming Platform. Retrieved from http://fortune.com/2018/06/28/snapchat-snap-gaming-platform/

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