Snap Inc (SNAP) Stock Tanks as Q2 Earnings Confirm Traders’ Worst Fears

In light of the 20% plunge shares of Snapchat-parent Snap Inc (NYSE:SNAP) suffered following the mid-May release of its first-quarter numbers, SNAP stock holders were understandably nervous as Thursday’s closing bell approached. After all, another disappointing quarter might prod the market into throwing in the towel altogether on Snap, sending it sharply lower on a more permanent basis.

Snap Inc (SNAP) Stock Tanks as Q2 Earnings Confirm Traders' Worst Fears

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As it turns out, the doubters had good reason to be concerned.

The company’s fiscal second quarter was … shall we say, less than thrilling? Moreover, SNAP stock was down more than 10% in Thursday’s after-hours action following the release of its quarterly report. Snap failed to impress on several fronts, but really fell short on the one front it couldn’t afford to botch.

Snap Earnings Recap

For the quarter ending in June, Snap turned $181.7 million in revenue into a loss of 36 cents per share. Analysts were collectively looking for a loss of 15 cents per share on revenue of $189.2 million. The company lost 14 cents per share of SNAP stock in the same quarter a year earlier, on revenue of $71.8 million. Spending grew just as much as sales did, which presents a problem in that Snap was already spending more than it was generating in sales.

Snap had reported lower a sequential revenue decline in the first quarter of the year … a red flag for a young company at this stage of its life, though the company chalked it up to seasonality. That headwind was evaded this time around, with the top line being another record-breaker for the company. As was noted though, it had to spend (very) heavily to drive that revenue.

More important than the raw fiscal numbers, however, was the company’s user growth (or lack thereof). Snapchat boasted 173 million active (daily) users as of the end of the second quarter. That’s 30.5 million more than the number of daily active users it boasted in the same quarter a year earlier, but was only 7.3 million stronger than Q1’s headcount. That’s a weaker growth pace than seen in the first quarter, and still unsatisfactory to investors.

Snapchat Just Isn’t Getting it Done

It has not been an auspicious start for Snap as a publicly-traded company. In short, its Snapchat platform’s user base is growing, but it’s not growing at the same rapid pace it was growing at just a few quarters ago.

This was modestly evident prior to the March IPO, based on data found in the prospectus. The percentage-based deceleration was largely dismissed as the impact of a fast-growing user base that made future growth look relatively weaker.

As it turns out, it mattered more than it seemed after the first quarter’s results were released in May. The company only added only eight million daily users that quarter, which was the smallest sequential add the company mustered in three years. Last quarter’s tepid progress only bolsters the worry of slowing growth.

It shouldn’t come as a complete surprise, however.

Prior to the release of the company’s second-quarter results, analysts voiced concerns about user growth rates. Based on data from app-download outfit SensorTower, Nomura explained that downloads of the company’s flagship Snapchat app were down 22% despite an effort from Snap to widen its net. Chief among those tactics was making the app more accessible to Android users.

Be that as it may, an investment in SNAP stock is increasingly less of an investment in a messaging app and increasingly more of an investment in a media company.

Tiptoeing into the world of video is one of the key growth initiatives outside the realm if instant messaging. In May, the company reached agreements with media companies like NBC Universal, ESPN and the Discovery to secure exclusive short-form (three to five minute clips) video available through the Snapchat app.

It remains to be seen if Snapchat’s videos will be able to steal users away from rival Facebook Inc (NASDAQ:FB), which is already a more robust video venue. The early indications are, however, that a healthy portion of Snapchat’s users — and millennials in particular — are engaged on that front.

The market isn’t enthused though. While it was all the rage prior to its early-March IPO, time and a couple quarters of full disclosure have forced traders to rethink their optimism about the company’s growth initiatives. SNAP stock is now trading around $11.90, down 30% from its initial public offering price of $17, and off 55% from its March peak thanks to Thursday’s response to the Q2 earnings report.

Bottom Line for SNAP Stock

It’s not an unfamiliar story. A young company has a fun, compelling concept and manages to draw a crowd. The buzz follows. The realization that the product — or app, in this case — isn’t all that marketable and lacks real staying power comes too late. While Snap and Snapchat will be fixtures in the future of consumer technology, SNAP stock just unofficially become too dangerous too own. The second-quarter numbers effectively confirm the market’s worst fears about the company.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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