Commentary

Snap Disappoints, Again -- Is It The New Twitter?

It isn't just me and it isn't just you. Wall Street is a crazy place. Okay, so after it seemed to lose its mind on Facebook, the gamble paid off. But what about Twitter? And more recently, what about Snap? How can companies that have never made a cent in profit be valued in billions?

My answer is always that it's like bitcoin. People are simply buying the stock because they expect other people to and that will raise the price. They're not looking at the core fundamentals of investing in a company that is likely to make good on its multibillion-dollar valuation.

Which brings us to Snap's latest figures. Losses have actually trebled to $400m in the past third quarter, year-on-year. Now, correct me if I'm wrong, but that is most definitely not the right direction. On the good side, revenue per user is up 12% from the second quarter to the third -- currently standing at $1.17. And revenue is up more than 60% year-on-year, to just over $200m in the last quarter.

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However, revenue is not up as much as predicted, and neither are user numbers, leaving the service at just over a third of the size of Facebook-owned Instagram with its 500m users. There has also been the spectacle debacle. The company has taken a $40m hit on its answer to the equally dismal Google Glass after it emerged that many owners have returned the novelty devices. 

The result? Shares have plummeted 20% -- and Snap is promising a redesign that it fears will mean the company could take another hit in the next quarter as users get used to the new look and feel of a service that it claims will be easier to use.

The elephant in the room here is that study after study is still showing that Facebook and its WhatsApp messenger service and picture-led Instagram service are all just as popular as Snapchat with millennials. Sure, Snapchat has a large audience of young consumers that advertisers want to reach, but then so too do Facebook and its sister services. 

Let's just take a look at those figures again and do a very un-scientific calculation. At the new revenue level of $200m per quarter leading to a loss of $400m the company must be seeing, very roughly, $600m going out the door every quarter. For every dollar it brings in, then, it needs to be making another dollar, just to balance the books for a single quarter.

There is some cause for optimism here, if that equates to asking whether the site can double the $1.17 it makes from each user per quarter because Facebook makes nearly four times that. Snapchat has corralled a very attractive market for advertisers at exactly the same time as video advertising spend and mobile marketing investment are spiking. So, it's in a good place. 

For me, all that's happening here is that investors, who got a hangover from the float, are sobering up to a hugely overpriced, overvalued stock. No wonder it is hovering around the $15 mark overnight, down from a post-float high of $27 in March -- that's getting on for nearly halving in value in just over half a year.

Snap obviously has to look at its burn rate -- which, no matter how many times you look at it, is simply staggering. It needs to push up its user numbers and, most importantly, find a way of closing the gap on Facebook regarding average revenue per user.

It's a very tough challenge, but the first thing it has to do is shake off that huge float valuation, which was nowhere near what a company that's actually losing bucket loads of cash is truly worth. It has an audience that advertisers want to reach on a mobile devices that are tough to target millennials on through traditional display. So there is a future for the service if it can improve revenues and slash that burn rate. As for the guys who said it was worth roughly twice what it turns out to be valued at this morning, I'm not so sure.

Hand on heart -- if you had to put your money on who's going to turn it around from being the quarterly disappointment for investors, Twitter of Snap, I think most people right now would probably plump for Snapchat. But only just. Neither is where either would want to be in terms of not disappointing on a quarterly basis.

Snap's survival can only be assured if a couple of obvious, huge issues are examined. Burning cash has to stop. Revenue per user has to at least double. 

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