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Is Snapchat’s Bubble About to Burst?

There is no hiding the fact that Snapchat has been on a relatively rough ride for the last few months. And the recent news reports suggesting a 16% drop in its shares indicates a pretty bad second quarter innings for the company as it failed to meet expectations for user growth, revenue, and earnings.

The social media firm has been on a downward path for a while now and the second quarter earnings report simply added to its misery. The growth of Snapchat has reportedly slowed down owing to intense competition from Instagram. The company earned 7.3 million active users (per day) and reached 173 million showcasing a growth rate of 4.2 percent. But this was less than the growth rate of 5 percent that it reported in the first quarter to reach 166 million daily active users.

The revenue of the company as reported on June 30, increased by 153 percent to reach $181.7 million. The expected increase in revenue earnings, as predicted by various financial analysts, was $186.8 million. It also reported a loss in earnings per share of -$0.16.

A large chunk of the revenue at Snapchat is generated via mobile advertisements that are displayed in the ‘Stories’ format. In addition to this, the social media platform also makes money out of advertiser-sponsored filters, tools, and lenses and competes with Google and Facebook to earn digital marketing and advertising dollars.

Snapchat struggles to compete with silicon valley biggies

The second quarter report of Snapchat, after it became a public listed company, got released at a rather critical time. The social media firm acquired the status of a public company in March amidst a pool of IPOs. There was a lot of hype about the possibility of Snapchat taking on Google and Facebook as a key player in the online advertising market, and it led to one of the biggest IPOs seen in the tech industry, specifically in Southern California. The initial response to the company was quite positive and there was a 44% increase in the company’s shares on the first trading day itself.

However, analysts on Wall Street, including Morgan Stanley, slowly dropped the expectations. Snapchat’s stock has remained under immense pressure and decreased by nearly 41% over the last three months.

Snapchat has reported double-digit daily user growth along with triple-digit revenue growth each year. However, it has been struggling to sustain high constant growth as is expected out of various other Silicon Valley firms such as Facebook.

Approximately 173 million users across the globe open the Snapchat app on a daily basis, and this indicates a 21% increase from the previous year. The average per user revenue has also increased by 109% from the same period last year. But in comparison to the previous three months of 2017, this growth isn’t very impressive.

Snapchat results disappointing

According to Laura Martin, who heads Equity Research for Needham & Co., it was quite surprising to see that Snap had managed to add a mere 7 million users in its second quarter. The instruments used by Snapchat and Facebook for counting daily users are different. But analysts view the two instruments to be quite similar.

Martin adds that it seems nearly impossible that Facebook added 50 million users in the second quarter and Snapchat couldn’t add even 8 or 10 million. This obviously explains the drop in the share prices of the company.

Out of the total daily users added by Snapchat from April to June, 4 million originated from North America. Europe was the second highest contributor of daily users (2 million), and the remaining share was distributed among other locations worldwide. During the same period in the previous year, Snapchat had reported 148 million users.

The social media firm confirmed a net loss amounting to $443 million (16 cents per share), exceeding the analysts’ loss prediction of 14 cents per share. The total expenditure recorded for the second quarter was $2.2 billion, credited primarily to a share-based compensation price of $2 billion.

Facebook and Instagram embracing Snapchat features

Snapchat recently faced a significant threat by competitor Facebook, which copied the “Stories” format of the company while also introducing lenses for all its apps. Facebook’s Instagram reports a greater number of active daily users in comparison to Snapchat. At the same time, the main app itself (Facebook) has acquired 2 billion users (per month) while WhatsApp and Messenger users have grown to approximately 1.2 billion.

As far as product innovation is concerned, Snapchat recently undertook some hardware experimentation by launching video-capturing sunglasses, also called “Spectacles”.

Facebook is following the footsteps of Snapchat and trying to venture into augmented reality and videos. According to Mark Zuckerberg, Facebook CEO, the company is planning to transform the social media platform into “video-first”. Both Snapchat and Facebook have been trying to introduce TV-like programming. There has been an extensive promotion of video/live video tools on Facebook, within the flagship app. In fact, it recently launched a new, innovative video tab named “Watch”.

With Snapchat struggling to float a dropping stock price in its second quarter, competitors have managed to catch up. Also, Snap is bound to Apple and the tech giant has its own goals with regards to augmented reality.

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