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Snap investors, avert your eyes!
It’s been exactly two years since Snap completed its very successful IPO. Snap had figured out how to reach the young people that Facebook was no longer capturing; investors hoped Snapchat would give Facebook and its stable of apps like Instagram and Messenger some legitimate competition.
Unfortunately for Snap, that hasn’t happened. In two years, the stock is down about 60 percent from the $24.50 price it closed at on its first day of public trading. It’s not a pretty slide.
There’s never one reason that a company’s business goes into a tailspin, especially when you take a look across a two-year horizon. But Snap’s issues are actually pretty easy to pinpoint: The company just hasn’t grown the way everyone expected it would.
Like Facebook and Twitter before it, Snap was considered a growth stock. Snap wasn’t profitable when it went public; in fact, it was losing hundreds of millions of dollars per year. (It’s still not profitable.) But the appeal for investors wasn’t immediate profitability — it was that Snap would provide the kind of rapid, network-driven growth that had turned Facebook into one of the world’s most valuable companies.
Two things happened. The first is that Snapchat made a big change to its advertising business — a switch to selling ads programmatically through software algorithms instead of through salespeople — that led to much lower ad prices and thus less revenue. Shortly after going public, without much historical success to fall back on, Snap’s business growth slowed more than people expected.
Then Snap made a more serious blunder. In early 2017, the company pushed out a redesign of its Snapchat app that left users angry and frustrated, and ultimately halted Snapchat’s user growth. The company has since rolled back parts of the redesign and hopes to jumpstart user growth with a new version of its Android app, but the momentum has been killed. (At least for now.)
That combination — slower-than-expected business growth as well as user growth — is the reason Snap’s stock chart looks so sad.
There are some reasons to believe that Year 3 may provide a turnaround. Snap had a strong end to 2018 on the revenue side — the company has long argued that its approach to ad sales is better for the long term, even if it hurt the company in the short term. And while Snapchat didn’t grow its user base (still a major concern), the company is still much bigger than Twitter and is finally starting to test the new Android app that it keeps saying will bring in new users.
“There’s roughly 2 billion or so — maybe more [than] 2 billion people who are on Android and don’t have Snapchat,” CEO Evan Spiegel said in early February. “So if we can take a few percent market share there, it would make a real difference to our user base.”
Is Snap in the clear? Definitely not. But two years after going public, it feels like there’s nowhere left to go but up.
This article originally appeared on Recode.net.
