In a vacuum, the first earnings report from Snap Inc (NYSE:SNAP) really wasn’t that bad: 286% year-over-year revenue growth is nothing to sneeze at. Nor is 36% growth in daily active users (DAUs) for the core Snapchat app. Snap Inc is sharply unprofitable, but that’s the nature of growth stocks. And for better or for worse, SNAP stock unquestionably is a growth stock.
The headline numbers weren’t good. Revenue growth of 286% was below analyst estimates for a 307% increase. An earnings-per-share loss of $2.31 missed the Street estimates by a stunning $2.12 per share, though stock-based compensation appears to be a major part of the miss.
But the divergence seems to be as much a matter of expectations and modeling as it is Snap Inc’s performance.
Of course, Snap stock also headed into the report with a market capitalization of $26 billion after one of the most widely covered IPOs of all time. And the expectations that IPO created cast their shadow over the quarter. Snap Inc’s growth was solid, but it simply wasn’t good enough. Looking at the numbers, however, it’s difficult to see why investors were expecting more.
Snap Inc Drives Growth in Q1
There was some good news in the SNAP Q1 report. As noted, DAUs rose 36% to 166 million. User metrics have been one key factor supporting the valuation for SNAP stock, and growth in that metric seems to help in terms of both valuation and the ‘story’ surrounding Snap Inc and Snapchat.
Average revenue per user (ARPU) nearly tripled, hitting $0.90 on a global basis and $1.81 in North America. The combination of more users and better monetization drove the explosive revenue growth in the quarter.
Below the top line, opex unsurprisingly increased — though a sharp jump in G&A to $78 million from $22 million likely didn’t comfort investors. But, again, SNAP stock is a growth stock. And while it’s too aggressive to say that earnings and margins don’t matter, they’re generally less important for early-stage companies. If revenue growth holds, the margin issues can be figured out down the line.
On their own, the growth numbers are solid — it’s not as if Snapchat is losing users, or seeing declining engagement. But clearly they weren’t solid enough to please investors. And that’s not necessarily the fault of Snap Inc.
Why SNAP Stock Investors Are Disappointed
Obviously, the growth figures weren’t good enough. And that’s somewhat fair: 286% revenue growth sounds amazing, but Snap Inc only recently has begun monetizing its users, and thus still is enjoying easy comparisons. While that user base rose 36% year-over-year, it rose just 5% quarter-over-quarter. That continues a recent deceleration. Per the Snap Inc S-1, DAU growth slowed toward the end of Q3, and it increased the same 5% QOQ in Q4. Obviously, investors were looking for an acceleration that simply didn’t come.
But at the same time, part of the problem here is investor expectations. Why, exactly, were analysts modeling an acceleration in users? The focus on the $2 billion in stock compensation that drove the earnings miss seems similarly unfair. That was a one-time impact (and boosted by the high IPO valuation).
Meanwhile, Twitter Inc (NYSE:TWTR) is still issuing $600 million-plus worth of stock a year, shows little revenue growth and receives mostly a free pass from the financial media (at least as far as stock-based comp goes).
There wasn’t much reason to model 10% DAU growth this quarter. Snap Inc wasn’t supposed to be profitable. The numbers could have been better, but they weren’t terrible. And SNAP stock still has room for improvement.
The Silver Lining for SNAP Stock
One question raised by analysts on the Q1 conference call was why Snap Inc is focused almost solely on North America, which drove 86% of Q1 revenue. (Incredibly, in Europe and the rest of the world, the $25 billion SNAP generated just $21 million in sales.) CEO Evan Spiegel replied that poor cell service in the developing world, in particular, was a major roadblock.
But the weak international revenue is just one of the problems highlighted by Snap Inc’s Q1. Of course, those problems also are opportunities. Snap Inc still is figuring out how to monetize its U.S. users, let alone overseas customers.
Snapchat is dominant on the Apple Inc. (NASDAQ:AAPL) iPhone, but far less so on Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android platform. It’s still learning how to drive advertiser demand, with Spiegel saying on the Q1 call saying “the big issue with advertising … is going to be education” of customers as to Snap’s attractiveness.
These are all problems for Snap Inc at the moment, but if the company can fix them, they provide multiple avenues for revenue growth to accelerate and profit losses to narrow. And to the broad point here, they shouldn’t have been a surprise to anyone remotely familiar with SNAP stock.
Again, expectations for Snap Inc’s Q1 simply were out of hand. And it’s important to remember that Facebook Inc (NASDAQ:FB) looked like a flop after its first few earnings reports as well. I certainly don’t expect SNAP stock to perform as well as FB stock has. But investors listening to the torrent of criticism facing Snap Inc today should remember that the company, and its earnings, aren’t the only reason for the post-earnings plunge in SNAP stock.
As of this writing, Vince Martin had no positions in any stocks mentioned.
