Snap Stock Slammed on Declining User Base Despite Earnings Beat

Snap stock - Snap Stock Slammed on Declining User Base Despite Earnings Beat

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Snap (NYSE:SNAP) beat earnings and revenue estimates. The company has yet to reach its goal of a quarterly profit. Still, both the revenue increase and the narrowing losses implied substantial growth. Nonetheless, traders sent Snap stock to record lows as the company reported that the number of daily active users fell during the third quarter. Given the falling stock price, this latest earnings report proves that SNAP needs both profits and a competitive moat to turn around Snapchat stock.

Snap Stock Beat On Earnings and Revenue

Snap earnings came in at an adjusted loss of 12 cents per share. This beat Wall Street expectation by two cents per share. It also showed improvement over the same quarter last year when the company reported a loss of 14 cents per share.

Snapchat stock also reported revenues of $298 million for Q3. This beat consensus estimates of $283.2 million. It also showed the company had made considerable strides in monetizing the site. Revenues came in at $207.9 million in Q3 2017.

Declining User Base Sent SNAP to Record Lows

SNAP also accomplished this revenue increase on a shrinking user base. For the second quarter in a row, the number of daily active users fell. This number now stands at 186 million, a 1% decline from the last quarter.

This sent the stock to record lows as it reinforced worries that Snapchat was losing versus Instagram, which is owned by Facebook (NASDAQ:FB). Snapchat has previously tangled with its larger and better-resourced peer as Facebook earlier co-opted its ‘Stories’ feature. In a further blow, Instagram has become the most popular social media app with teens, according to Piper Jaffray.

CEO Evan Spiegel had earlier expressed a goal of full-year profitability for 2019. While this report did not specifically mention that goal, it announced a series of monetization efforts. Product catalogs, augmented reality marketing, and six-second commercials during its original programming stand as examples of these endeavors.

Market Reaction Affirms Future ‘Penny Stock’ Status

That said, Snapchat will need a ‘lipstick on a pig’ filter if it wants to characterize Wall Street’s attitude toward this report. Like the earnings from Twitter (NYSE:TWTR) implied, Wall Street would likely forgive the drop in daily active users if the company began to turn a profit. However, Twitter dominates a different social media niche in microblogging. Unless its homegrown content can develop a following, Snapchat offers nothing that Facebook, Instagram or just plain texting cannot take away.

For these reasons, I agree with Wall Street’s reaction to this earnings report. As I implied in a recent article, I think this report reaffirms Snap stock as a penny stock in the making. Despite the drop, Snapchat stock trades at almost nine times sales and supports a market cap exceeding $7.5 billion. Even with a share price in the low $6 per share range, SNAP continues to establish new 52-week lows. Unless it earns a profit soon, Snap stock will continue on a downward path that no filter can hide.

The Bottom Line on Snap Stock

The latest earnings report for Snap stock confirms the company’s need for both a niche and a path to profitability. Although Snapchat stock beat estimates on both revenue and earnings, a falling number of daily active users inspired widespread selling.

Now, Snap stock trades near a new 52-week low, and Wall Street continues to lose confidence in the company. It remains possible that its monetization efforts could bring a profit, and possibly establish a following that brings both daily active users and increased revenues. However, unless they find such a niche soon, Snap stock will become a penny stock, and Snapchat will become the Myspace of smartphone apps.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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