San Francisco - Snap added fewer users than projected in the first quarter, a sign that Facebook’s strategy of copycatting virtually every feature of its Snapchat app is taking a toll on the newly public company. The stock tumbled 26%.
In its debut earnings report after a March initial public offering, Snap, whose mobile app lets users send disappearing video and photo messages, said it added 8 million daily active users in the period, for a total of 166 million, with growth from a year earlier slowing to 36%. Revenue also fell short of analysts’ estimates.
Snap is working to prove that it can attract a dedicated young audience in the competitive social-messaging market, justifying a market value of almost $27bn.
The Snapchat app initially drew attention for letting people add fun filters and overlays to their mobile photos and videos, virtually turning human faces into puppies or crowning them with flowers. In the past six months, Facebook has adopted many of the same features for its own social applications, including Instagram. To keep wooing users and building up ad revenue, Snap has to move faster than its larger competitor.
“They have to prove that they can keep innovating features, products, and functionality that makes Snapchat engaging for consumers and useful for advertisers,” said Mark Mahaney, an analyst at RBC Capital Markets. “All of these innovations that Facebook and Instagram are making could be undermining the growth of Snapchat.”
The company’s shares, which had gained 35% since its March 1 IPO at $17, dropped as low as $17.07 in extended trading following the report. They had slipped to $22.98 at the close in New York.
Six analysts polled by Bloomberg on average had projected 168 million daily users for the period. Snap reported first-quarter revenue of $149.6m, missing the $158.6m average analyst estimate, according to data compiled by Bloomberg. The net loss came in at $2.21bn, including $2bn in stock-based compensation costs.
The Los Angeles-based company has been trying to improve the set of metrics it gives marketers about how well its ad offerings perform, teaming up with third parties to verify measurements.
Its pitch so far has been to tout a hyper-engaged set of users that skews younger than other social apps. The company said users created more than 3 billion daily "snaps" in the quarter, up from more than 2.5 billion in the third quarter of 2016.
“The advertising community really wants to support this network,” said Rob Sanderson, an analyst at MKM Partners. “It’s a demographic that everyone struggles to reach.”
Still, Sanderson said, investors are concerned that unless it rapidly adds users, Snap’s ability to sell more advertising will reach a plateau at some point. User growth is a familiar challenge - one that has dogged another social-media company, Twitter, since its first earnings report in 2014.
Snap argues that it has a different strategy than the rest of the social networks, and isn’t interested in adding users all over the world like Facebook and Instagram. Instead, it wants to attract consumers in only the most developed markets, where there’s a robust advertising market and where the internet is fast enough to produce its fun video and photo effects without too much lag time.
Those users will be more lucrative than the addition of more people in other markets, the company argues. Snap on Wednesday reported that it makes 90 cents per user, down 14 percent from the previous quarter.
Snap so far hasn’t talked publicly about competition from Facebook. But Facebook has mentioned Snap’s strategy, without mentioning the smaller company by name. Last month, at Facebook’s developer conference, CEO Mark Zuckerberg said he was prioritizing development of camera tools as a step toward an augmented reality-focused world.
Last week, during Facebook’s earnings report, Zuckerberg said he now considers Facebook to be ahead of Snap in the strategy Snap invented.
“We were a little late to the trend initially,” Zuckerberg said last week. “I do think at this point we’re pretty much ahead, in terms of the technology we’re building. I would expect us to continue leading the way forward.”
On a conference call after Snap’s report on Wednesday, CEO Evan Spiegel brushed off concerns about Facebook’s clone features with a laugh.
“If you want to be a creative company, you have got to be comfortable with and enjoy the fact that people copy your products if you’ve got great stuff,” Spiegel said. “Just because Yahoo! has a search box doesn’t mean they’re Google.”
Companies tend to time their initial public offerings so that the following few quarters show momentum for their business. In this case, Snap is missing estimates on several fronts, fueling skepticism about the company’s plan.
“There’s some explaining to do,” said James Cakmak, an analyst at Monness Crespi Hardt & Co.
After Twitter’s first earnings report in 2014, the shares fell more than 24% amid skepticism about the company’s user growth. Following Facebook’s first report in 2012, shares fell 12% on concern that the social network wasn’t moving fast enough to make money from its app on mobile phones, where its users were migrating.
Facebook recovered in the quarters that followed with advertising product improvements, while Twitter has continued to struggle.