It wasn’t long ago that Snap was being hailed as Facebook’s greatest challenger. After turning down its rival’s offer to acquire the company for $3 billion just a few years ago, the company behind Snapchat was valued at more than $40 billion earlier this year.
Its popularity has always been tied to a unique user experience that leverages video and images in social engagement, but the company’s value soared on the strength of its Snapchat marketing solutions, which created a robust revenue stream and an influx of cash that seemed to indicate Snap was ready to stand shoulder-to-shoulder with Facebook.
Now those expectations seem premature. Snap has come under fire this summer for a slowing user growth rate and advertising revenue that fell short of projections. Investors are leery, with some experts arguing against purchasing Snap stock and taking a wait-and-see approach.
Snap isn’t in crisis mode yet. Its 173 million active users is 30 million more than at the same point one year earlier, and the company still raked in $181.7 million in revenue in the second quarter. Compared to a rival like Twitter, which has been around for far longer and remains much further away from developing viable revenue channels, Snap doesn’t face any immediate threats. And some would argue that its slowing growth rate is more a sign that the platform is maturing: At some point, it’s inevitable that growth has to begin to taper off.
Nobody’s jumping ship on Snap just yet, but many investors and marketers are trying to figure out where the company is headed. Are recent trends a sign that Snap has finally grown up? Or are its growing pains the product of revenue challenges likely to get worse over time?
In terms of its ability to attract and retain an engaged user base, Snap continues to sit pretty. It may not operate at the scale of Facebook, but it has clearly surpassed Twitter and has so far maintained an edge over Instagram, which enjoys much greater financial stability thanks to being owned by Facebook.
No one is complaining about Snapchat’s user experience: As Ad Age points out, the average user twenty-five years of age and younger is still spending an average of forty minutes per day in the app. And Snap’s performance in North America far exceeds its growth in other parts of the world: Business Insider points out that from Q2 2016 to Q2 2017, its North American active user base grew by nearly 23 percent. That’s much more satisfying growth, and it comes among a regional user base that is considered more lucrative to advertisers than other global communities.
According to Barron’s, Snapchat users are engaged with the app throughout the day, opening the app an average of twenty times each day. And it’s telling that Facebook, Instagram, and other companies have been aggressive in trying to replicate the visual features and storytelling functionality that Snapchat brought to the mainstream. There’s no question Snapchat built a great product, and despite copycat practices from its rivals, it has managed to retain its user base through the quality of its mobile experience. Even innovative campaigns like its Spectacles glasses have managed to uplift the user experience without melting down into a costly PR blemish à la Google Glass.
These are all signs of a great product. But Twitter is a great product, too. The quality of Snap’s social media solutions has never been in doubt. The question is whether that great product can be leveraged as a big-time moneymaker. Twitter is still trying to figure that out. And based on rumblings from brand advertisers, Snap is, too.
When revenues missed projections in the second quarter of 2017, Snap’s stock value quickly dipped. The poor revenue numbers are only part of the reason investors are getting skittish about buying Snap shares. While $181.7 million is a tall stack of revenue, that number quickly comes into perspective when balanced out by $442 million in expenses for the same quarter. Snap is burning through cash to fund its R&D, Snapchat marketing and sales strategy, and acquisitions to improve its advertising platform: Fortune notes that the company spent $1.1 billion over a twelve-month period ending in June.
At the moment, all of Snap’s earnings are being re-invested into deeper investments to improve the value of its social media marketing platform, but that re-investment is only covering part of the cost. The spending can easily be interpreted as an indication that Snap knows its advertising options aren’t where they need to be. Barron’s reports that Deutsche Bank analyst Lloyd Walmsley has been seeing a trend of advertisers turning cool to Snap. Even as they acknowledge improvements to Snap’s advertising technology, Walmsley has seen “a reduced imperative for advertisers to experiment with Snap advertising.”
Image attribution: Sylwia Bartyzel
One reason for that declining interest? Facebook has managed to outfit Instagram with superior advertising options, even if the app’s user experience continues to trail what Snapchat can offer. The short-term fear for advertisers is that Snap’s advertising is still inferior to what Facebook can offer. The long-term worry is that Snap doesn’t have enough runway to spend itself out of this hole.
Snapchat will likely continue to add users, and its reputation among younger users isn’t under threat. But as it sets its sights on competing with Facebook, its leaders must be looking over their shoulders and worrying that they are at risk of suffering the same fate as Twitter. If Snap can’t improve its social media marketing technology to impress and intrigue advertisers, it might never be able to capitalize on the promise of its brilliant, beloved social network.
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Featured image attribution: Max Perzon