Snap (NYSE:SNAP) has disappointed investors since coming public earlier this year. Both of its first two quarterly earnings reports presented results below analysts' expectations. Now, one of the leading digital marketing research firms, eMarketer, is lowering its full-year revenue expectations below any of Wall Street's analysts.
eMarketer expects Snapchat to generate just $774.1 million in ad revenue this year. That's down from its $900 million estimate about six months ago, and $935.5 million estimate a year ago. It's also below the lowest estimate on Wall Street for Snap's 2017 revenue, which currently sits at $787.8 million.
eMarketer's lower expectations stem from two factors: slower than expected user growth, and poor advertiser sentiment.
Slower than expected user growth
Snapchat's slowing user growth has been well documented. Ever since Instagram launched Stories -- a direct copy of a core Snapchat feature -- users just aren't joining Snapchat like they used to. Snapchat went from accelerating user growth last year, to a significant slowdown this year reaching just 21% last quarter. For reference, Facebook (NASDAQ:FB) says Instagram daily users grew 25% (from 400 million to 500 million) in a bit less than eight months between February and September.
The outlook for user growth going forward doesn't bode well. Snap has yet to prove it has a way to overcome the challenge of Instagram (and others) copying its best features. As a smaller platform, it doesn't benefit from the network effect of a company like Instagram or YouTube.
In its S-1 filing with the SEC before going public, Snap said its only competitive advantage is its ability to innovate. But when going up against the R&D budget of Facebook, Snap will get crushed. Even when it has been innovative, it can't do much to stop competitors from copying its innovations and stymieing its user growth.
Advertisers just aren't that into Snapchat
Snap boasts about Snap's young and highly engaged audience. Users under 25 spend an average of more than 40 minutes per day in the app. That's a very attractive audience for advertisers, but eMarketer notes most advertisers still aren't ready to invest heavily with Snap like they do with Facebook.
In a survey in February, just one in five advertisers on Snapchat said they spent more than 10% of their ad budgets on Snapchat. 74% of marketers said they don't advertise on Snapchat at all. Comparatively, two out of three Facebook advertisers spent more than 10% of their total ad budgets on the platform.
As eMarketer puts it, Snapchat ads remain in the experimental bucket for most advertisers. Snap is making it easier for marketers to experiment with the introductions of its API ad-buying partners and its own self-serve platform, but it's not doing much to move past the experimentation point. Snap needs to prove its ads are worth the cost. Advertisers have pointed to poor return on investment on their Snap ad purchases in the past.
Strong growth still ahead
Long term, Snap still has a lot of potential. The recent introduction of its self-serve platform has caused its average ad price to decline, but that appears to be a temporary impact as Snap works to get more advertisers buying ads through auction and boost the number of bidders. It's a necessary move for Snap to continue scaling.
eMarketer expects Snapchat's ad revenue to grow to $1.47 billion next year, which is still below the consensus estimate, but above the low end on Wall Street. By 2019, it expects Snap to bring in $2.72 billion.
While Snap might not grow as much as anticipated this year, its moves toward a self-serve platform and its new ad products should help it meet growth expectations over the next few years. That said, it's on management to execute in bringing more advertisers onto its self-serve platform, improving the efficacy and measurement capabilities of its ad products, and keeping its audience engaged and growing.