Snap's (SNAP -0.07%) tenure as a publicly traded company is off to a rocky start. After the company reported disappointing first-quarter results, the share price cratered back toward its $17 IPO price. Shares have recovered slightly but are still well short of where they traded shortly after the stock went public.
Snap's first-quarter revenue of $149.6 million fell short of analysts' expectations of $158.1 million. Snap wants to ensure it doesn't fall short again, and it's goosing its ad business by offering discounts and incentives to ad buyers, according to a report from DigiDay.
While it's not uncommon for digital advertising companies to offer coupons for new ad products, Snap's incentives appear to be aimed at pulling revenue forward into the second quarter. Analysts currently expect Snap to post $192.7 million in sales for the second quarter, and management is desperate to hit that mark.
A big push for more advertisers
Digiday's report indicates Snap is focused on attracting more users to its API and self-serve platform. Those platforms allow for better targeting and easier measurement compared with wide branded ad campaigns across the entire Snapchat user base.
In a recent talk with J.P. Morgan analysts, Chief Strategy Officer Imran Kahn said the biggest obstacle Snap needs to overcome is educating its advertisers. Offering a discount on its ad products opens the door for more advertisers to find out how its ad products compare with bigger rivals such as Facebook (META 2.88%) and Google. Snap can take the opportunity to show new advertisers its measurement and targeting capabilities.
If Snap does a good job and delivers the results Kahn indicates it can, it stands a good chance of keeping new advertisers on and grabbing a larger share of their budgets. What's more, as it attracts more advertisers to its self-serve and API platforms, it'll show more leverage in its sales and marketing expense. These platforms can easily scale to hundreds of thousands of advertisers if Snap is ever so lucky to have them.
For a limited time only
The timing of Snap's coupons is a bit transparent. According to the report, the offers expire mid-June, which coincides with the end of Snap's fiscal second quarter. Snap clearly wants to get more orders in before the end of the quarter, so it can report a good number to investors.
But it does so at the risk of pulling forward revenue from the third and fourth quarter. Ad dollars that businesses were saving for the second half of the year may be more economically spent in the second quarter thanks to Snap's discounts. Once it's spent, it's gone. Unless Snap can win over some budgets from digital advertising competitors, the impact of these coupons could be short-lived.
While Snap could post good results in the second quarter, it could face a similar problem later in the year. It can't continuously run promotions to attract more ad budgets and new advertisers, so it needs to find a sustainable way to grow its share of digital advertising.
Anything you can do, I can do better
The biggest challenge Snap faces is convincing advertisers that its ads are a viable alternative to Facebook and Google. That's an even bigger challenge now that Facebook is copying its features and ad products.
Facebook's Instagram Stories has over 200 million daily users, and WhatsApp Status has over 175 million users. By comparison, Snapchat averaged just 166 million users per day in the first quarter. What's more, Facebook has better targeting capabilities, and most advertisers are familiar with its ad-measurement platform. Facebook holds a significant advantage over Snapchat when it comes to displaying ads Snapchat invented. (And it wouldn't be the first time Facebook copied an ad product and had more success with it.)
As a result, Snapchat may face a lot of pressure on its ad prices, and it's unlikely to monetize its users at anywhere near the rate of Facebook anytime soon. The coupons it's offering advertisers today may be just one example of the pressure on its pricing.