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Is Snap having its Facebook stock moment? Or are things really as bad as they seem?

Snap has had two bad quarters in a row. What’s the deal?

Vanity Fair New Establishment Summit - Day 1
Snap CEO Evan Spiegel
Michael Kovac/Getty Images for Vanity Fair

Snapchat delivered another disappointing earnings report on Thursday, the second time it has underwhelmed Wall Street in its first six months as a publicly traded company.

The issue in Q1 was that Snap’s business didn’t grow as quickly as expected, and its spending grew much quicker than expected. In Q2, its revenue growth issues returned, but Snap also added fewer new users than Wall Street wanted.

It was a bad combination, and in both cases, the stock took a dive. Snap now stands well below its $17 IPO price tag, and in after-hours trading on Thursday, it fell more than 53 percent below the $24.48 closing price it had after its first full day of trading back in March.

More than five months into life as a public company, it’s time to ask: Is Snap simply having its post-IPO Facebook moment, where its stock spends a year in the cellar before a valiant comeback? Or are Snap’s troubles here to stay?

First, the positive scenario. It’s possible that Snap is simply facing the growing pains that Facebook faced in the first 12 months after its own IPO, and there is mounting evidence to support the idea that Snap simply went public too early. If that’s the case, perhaps it will grow into expectations over time.

A few reasons to believe that Snap rushed its IPO:

  • There was a legitimate motivating factor for CEO Evan Spiegel to rush an IPO: An $800 million bonus. Spiegel received the bonus on the condition that he would take Snap public, which he did. Perhaps earlier than he should have.
  • One of Snap’s key metrics for measuring business growth is ARPU, or revenue generated per user. Snap insiders have argued in the past that the company believes its ARPU could one day be as big as Facebook’s, meaning that while Snapchat’s user base may not be as big as Facebook’s, it could still make money off each user the way Facebook does.

But at the time of its IPO, Snap’s business was nowhere near as mature as Facebook’s was when it IPOed. Facebook’s ARPU the quarter that it IPOed was more than double Snap’s ARPU the quarter it IPOed. And Facebook wasn’t dealing with a much bigger incumbent trying to squash it into oblivion.

  • One of Snap’s main advertising challenges is that some advertisers still have no idea why they should give Snap their money. Snap’s chief strategy officer, Imran Khan, said on Thursday’s earnings call that Snap was “working on the education process” with advertisers. Education takes time, and Wall Street isn’t always patient.

So those who believes that Snap IPOed too early might take solace in the idea that things could improve with time. But there are plenty of other signs here that Snap’s problems are much bigger than simply going public too soon, the most notable of which is the app’s user growth.

A year ago, Snap was growing quickly. It added 21 million new users in Q2 2016. A year later, in Q2 2017, it added just seven million new users. That’s not the kind of growth Snap investors envisioned 12 months back, and we know from watching Twitter how hard it can get for a public company once user growth slows down.

Snap has not been focused on growing in emerging markets, arguing that the cost of supporting and adding users in emerging markets would be more than they’d make from them in advertising revenue. So it’s possible that Snap’s user growth could shoot up again once those emerging markets become a priority, but no one knows when that will be, or if Facebook will have already beat them there with their own product.

Snap’s business is also showing concerning signs. Snap’s Q1 revenue was less than people expected, and the company said it was due to “seasonality.” Advertisers simply spend less in Q1 following a busy holiday quarter than they do in other quarters.

But as Ben Thompson, who writes an insightful tech and media newsletter called Stratechery, pointed out at the time: Snap’s business should be too young to be impacted by seasonality. “If it has the ‘great advertising business’ that [Snap chief strategy officer Imran] Khan claims then growth should easily overcome seasonality,” he wrote. Seasonality is for more established advertising businesses like Facebook and Google, not super-hot upstarts.

On Thursday’s call, a number of analysts asked about seasonality, and Khan said that seasonality will become “muted,” but that it will “will take some time.” Snap already braced investors for some seasonal impacts next quarter — executives pointed to the Olympics and the U.S. presidential election in Q3 2016 as important world events that buoyed their business. Those won’t happen in Q3 2017, and should be taken into account when projecting Snap’s revenue, these execs said.

It’s too early to close the book on Snap. But there isn’t a lot of positive trends for investors to grab hold of, either.

Up next for Snap: Monday, when current employees can finally sell shares for the first time. If employees rush to sell at what will most likely be one of Snap’s lowest stock prices ever, we’ll know things look as bad from the inside as they look from out here.

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