Social-media company Snap (NYSE:SNAP) recently reported second-quarter numbers which exceeded top and bottom line expectations. SNAP stock initially rallied as much as 10% in after-hours trade following the SNAP earnings report.

But, then SNAP stock stock reversed course. Investors started to notice that despite the headline beats, the underlying numbers for SNAP earnings weren’t that great. Namely, revenue growth is surprisingly slow, the user base is maxed out, and losses are still huge. SNAP stock subsequently swung from a 10% gain to a 6.4% drop as of this writing.

Don’t be fooled by the initial pop in SNAP stock. Many on the Street expected Snap’s quarter to be as bad as Facebook (NASDAQ:FB) or Twitter’s (NYSE:TWTR) most recent reports. But, it wasn’t that bad. So SNAP stock popped.

But, the quarter wasn’t good either, and definitely not good enough to warrant a 10% jump in price. Thus, SNAP stock is down now.

It all makes sense. The reality is that without robust user growth, SNAP stock is a tough buy here above $12. I don’t think this stock is worth a look until $10.

Here’s a deeper look.

Snap Earnings Report Just Wasn’t Good

Bulls will point to Snap’s Q2 revenue and earnings beats to show that the quarter was a success. But, that simple calculus ignores the underlying fundamentals.

Underneath the headline beats, however, there were some serious concerns in the numbers. The biggest of those concerns is that the user base is getting smaller. Daily active users dropped 2% from last quarter to 188 million. Although the user base was up 8% year-over-year, that year-over-year growth rate has come down dramatically from 36% five quarters ago. Plus, at this early of a stage (under 200 million users), Snap shouldn’t be seeing any sequential declines in user base.

Unless… the user base is maxed out. This reminds me of a Twitter situation. Twitter’s sequential user growth first slipped into negative territory in the fourth quarter of 2015 when the monthly active user base went from 307 million to 305 million. Since then, Twitter’s user growth has been muted. The user base currently sits at 335 million, up just 30 million in two and a half years.

I see the same thing playing out with Snap. The user base is nearing full capacity around 200 million users, and user growth going forward will be muted. Without big user growth, it will be tough for SNAP stock to justify its huge valuation.

Beyond user growth, revenue growth wasn’t terribly impressive. Average revenue per user (or ARPU) rose 34% in the quarter, which is the same as last quarter. That is good, but not great. Without big user growth, 34% ARPU growth led to just 44% overall revenue growth. Before the bulls celebrate 40%-plus revenue growth, let’s remember that Facebook, in its recent “awful” quarter, reported 42% revenue growth on a far, far larger base.

On the margin side, things are improving. But not by much. Net loss narrowed by 20%, but the company still lost a whopping $353 million in the quarter.

Overall, Snap’s quarter simply wasn’t good, and the sell-off in SNAP stock makes sense considering the user base decline, unimpressive revenue growth, and still huge losses.

Snap Stock Will Have A Tough Time Without User Growth

Going forward, SNAP stock will struggle without big user growth.

Let’s look at history. Twitter’s user growth went negative in the fourth quarter of 2015. At that point in time, Twitter was a sub-$20 stock. It largely remained a sub-$20 stock for the next 20 months.

I think a similar thing will play out with SNAP stock. At more than 15x trailing sales, SNAP stock needs robust user growth to justify further gains from here. But, it doesn’t look like SNAP stock is going to benefit from healthy user growth going forward. Thus, 30%-plus gains in ARPU is where all the growth will come from, and that simply isn’t enough to justify further share price appreciation from a 15X trailing sales base.

Long-term, I think Snap can grow its user base to 220 million in 5 years, and that ARPU can trend towards $15 (versus ~$5 last year). During that stretch, I expect spending growth to moderate, and for operating margins to expand to 30%. Even under those rosy growth assumptions, I still think Snap’s earnings power in 5 years is just $0.55 per share.

A big-growth 25x forward multiple on $0.55 implies a four-year forward price target of $13.75. Discounted back by 10% per year, that equates to a year-end price target for SNAP stock of just over $10.

Bottom Line on SNAP Earnings

Snap’s Q2 earnings report wasn’t good. The big takeaway is that user growth went negative on a sequential basis. Considering user growth has been consistently slowing for several quarters, this decline isn’t a one-off. It is a sign of the times, and in these times where Snap isn’t adding users, SNAP stock will have a tough time fighting for gains.

As of this writing, Luke Lango was long FB.