Layoffs Are Yet Another Red Flag for Snap Inc Stock

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SNAP stock - Layoffs Are Yet Another Red Flag for Snap Inc Stock

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Snap Inc (NYSE:SNAP) could be a great promising company. By extension, SNAP stock could be a compelling, even if speculative, investment. The organization just needs to quit sabotaging itself.

It’s a point that’s been made before (including more than once by this reporter). But, it bears repeating again here in the wake of yet another ill-advised round of layoffs, and in the shadow of yet more flimsy spin on the decision. In short, SNAP — the parent company of messaging app Snapchat — argues that it will improve productivity with fewer people involved.

To be fair, it’s possible for a company to do more with less. Sometimes employees are redundant. Other times, different teams may be inadvertently subverting one another.

It’s difficult to say whether that was a problem this time around, though. This latest round of layoffs looks more like the “We’re just not making enough money” type, if we’re being realistic.

See Ya, Sales Staff!

It’s actually not “news,” technically speaking. The company warned employees in early March that it would be culling more than 100 workers, alluding to a shakeup in its engineering division.

The possibility became reality in an official company filing. SNAP disclosed that 220 employees had been booted in March, not just from engineering, but from the sales team as well.

The SEC-filed document explained: “As a result of the reduction in force, we expect to recognize savings of approximately $25 million in 2018 and $34 million on an annualized basis related to salaries and payroll taxes,” adding, “The charges associated with this reduction in force are not material to our consolidated financial position or results of operations.”

It was the early March internal letter, though, that really added some color — and confusion — to the matter. It read:

“Having high-performing, technically excellent, and appropriately aligned teams will be critical to building both a compelling product and a compelling culture for engineers. We want to unleash speed and productivity in our organization, while keeping a high technical bar.”

More speed, greater productivity and continued technical prowess apparently can be achieved with fewer people on board.

Reality Check

The explanations are superficially laughable — savings of $34 million for a company that’s generated nearly a billion dollars’ worth of revenue over the past four quarters, and the notion that less people gets more work done. But, in some regards, a little streamlining makes sense.

Undoubtedly, some people were initially hired just for the sake of preparedness, and it’s only recently become clear there’s just not enough meaningful work to be done by them.

Likewise, it’s conceivable that as Snapchat has matured and become better known as an advertising platform, its sales work has been refined and reshaped to where fewer people can make the same number of pitches.

Rival Twitter Inc (NYSE:TWTR) laid off nearly a tenth of its workforce in late 2016, for instance, yet its most recently reported quarter was its most profitable ever without sacrificing revenue (though it didn’t really grow the top line either). Maybe SNAP can do without the people it just let go.

Snapchat is no Twitter, though. Twitter has (more or less) found a winning formula. SNAP stock owners know all too well Snapchat continues to struggle to find the balance between marketability and usability.

Case in point: The recent redesign of the app’s interface has really, really displeased too many of its loyal users. MoffettNathanson analyst Michael Nathanson recently noted:

“Our first takeaway is that Snap’s redesign has clearly been a bust. All three groups [middle school students, high school students and young college graduates] were uniformly disapproving of it … A year ago Snap was widely described as ‘fun.’ This year, the key word was ‘annoying.'”

Meanwhile, despite the Cambridge Analytica scandal and the subsequent #deletefacebook movement, users have remained loyal to the social media platform offered by Facebook, Inc. (NASDAQ:FB). A recent survey taken by Deutsche Bank Markets Research revealed that only one percent of the 500 users polled actually closed their Facebook accounts.

It’s a kind of loyalty/stickiness/interest Snapchat has only been able to dream about.

Bottom Line for SNAP Stock

In other words, while SNAP will clearly save some money up front by shrinking its headcount, the move doesn’t necessarily mean SNAP stock will see better days. It may not even see more profitable days, if revenue somehow shrinks as fewer people are selling its ad inventory.

Indeed, if nothing else, the engineers and salespeople just laid off could have been repurposed to do research on Snapchat’s target market. With a little more such insight, the company may have been able to avoid the Spectacles debacle, which ended up costing SNAP an extra $40 million in write-down charges late last year.

Therefore, it’s difficult to interpret March’s job cuts as anything but bad news for Snap stock. This is a company that’s yet to prove it can make good, strategic use of layoffs as an opportunity streamline. This is still a company that’s struggling to prove it’s got a viable, sustainable product. Saving $30 million a year won’t change that reality.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/layoffs-are-yet-another-red-flag-for-snap-stock/.

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