Snapchat adds fewer users than forecast

Sarah Frier
Bloomberg News

Snap Inc.’s Snapchat app added fewer users than projected in the first quarter, a sign that the young company may have trouble expanding its audience as social-media giant Facebook Inc. copies its most popular features. The stock tumbled 21 percent.

In its debut earnings report after a March initial public offering, Snap, whose mobile app lets users send disappearing video and photo messages, said it added 8 million daily active users in the period, for a total of 166 million, with growth slowing to 36 percent from a year earlier. Revenue also fell short of analysts’ estimates.

Snap is working to prove that it can attract a dedicated young audience in the competitive social-messaging market, justifying a market value of almost $27 billion. The Snapchat app initially drew attention for letting people add fun filters and overlays to their mobile photos and videos, virtually turning human faces into puppies or crowning them with flowers. In the past six months, Facebook has adopted many of the same features for its own social applications, including Instagram. To keep wooing users and building up ad revenue, Snap has to move faster than its larger competitor.

“They have to prove that they can keep innovating features, products, and functionality that makes Snapchat engaging for consumers and useful for advertisers,” said Mark Mahaney, an analyst at RBC Capital Markets. “All of these innovations that Facebook and Instagram are making could be undermining the growth of Snapchat.”

The company’s shares, which had gained 35 percent since its March 1 IPO at $17, dropped to $18.15 following the report. They had slipped to $22.98 at the close in New York.

Six analysts polled by Bloomberg on average had projected 168 million daily users for the period. Snap reported first-quarter revenue of $149.6 million, missing the $158.6 million average analyst estimate, according to data compiled by Bloomberg. The net loss came in at $2.21 billion, including stock-based compensation costs.

The Los Angeles-based company has been trying to improve the set of metrics it gives marketers about how well its ad offerings perform, teaming up with third parties to verify measurements. Its pitch so far has been to tout a hyper-engaged set of users that skews younger than other social apps.

“The advertising community really wants to support this network,” said Rob Sanderson, an analyst at MKM Partners. “It’s a demographic that everyone struggles to reach.”

Still, Sanderson said, investors are concerned that unless it rapidly adds users, Snap’s ability to sell more advertising will reach a plateau at some point. User growth is a familiar challenge — one that has dogged another social-media company, Twitter Inc., since its first earnings report in 2014.

Snap argues that it has a different strategy than the rest of the social networks, and isn’t interested in adding users all over the world like Facebook and Instagram. Instead, it wants to attract consumers in only the most developed markets, where there’s a robust advertising market and where the internet is fast enough to produce its fun video and photo effects without too much lag time.

Those users will be more lucrative than the addition of more people in other markets, the company argues. Snap on Wednesday reported that it makes 90 cents per user, down 14 percent from the previous quarter.