All good streaks must end, and for Snap, Inc. (NYSE:SNAP) shareholders, it seems as if a poorly received third-quarter report will end the stock's string of three consecutive winning months. Snapchat's parent company is moving lower on Wednesday, and while it's still well above its early August lows, this month's losses are taking a big bite out of the three months of gains.
It was a brutal report. Revenue climbed 62% to $207.9 million, but analysts were holding out for an 87% surge. Daily active users may have clocked in at 178 million -- up from 158 million a year earlier and 173 million for this year's second quarter -- but analysts were holding out for a tally closer to 181.8 million daily active users. Throw in a charge on unsold Spectacles inventory and more red ink, and even Tencent (NASDAQOTH:TCEHY) taking a 10% stake in Snap couldn't stop Wednesday's slide.
It doesn't have to be that way. Let's go over a few of the things that can turn things around for investors in the coming months.
1. App makeover needs to go smoothly
Snap is conceding that Snapchat needs to be more intuitive. The app is being redone, and it's going to have a lot riding on it. Can Snapchat retain some of the complexities that made it an appealing badge of honor for millennials while still making it easier to use to reach a broader audience?
Making a change to attract new users means not alienating the 178 million daily active users who are already there. It's a gamble, and perhaps a necessary bet as it sees rival Instagram pulling away in popularity. The makeover could jump-start growth, or it could be the beginning of the end for Snapchat. There will be no middle ground.
2. Tencent needs to get hungrier
China's Tencent revealed in a regulatory filing that it has bought roughly 146 million shares in the open market. Along with a small pre-IPO stake, Tencent now has a 12% stake in Snap.
Tencent boosting its stake is a big deal, and not just because snapping up shares in the open market tightens up the stock's float. Tencent may not be a household name here, but it's a dot-com darling overseas. Snap needs to grow a larger global presence, and with more at stake, Tencent could help make that happen.
3. Snap needs to snap another streak
Owning Snap during earnings season has been consistently hazardous to its investors' wealth. The stock plunged 21% the day after posting its first-quarter results. Three months later, we saw the shares slide 14% the day after offering up disappointing second-quarter financials. Wednesday's hit makes it three-for-three on double-digit percentage declines the day after earnings in its brief tenure as a publicly traded company.
You would have to be nuts to own Snap three months from now, when it reports its fourth-quarter results. It's been genetically engineered to break your heart, if not your pocketbook, on earnings day. However, just as we're seeing Snap's streak of monthly gains end in November, all it takes is a well-received quarter to at least entertain the notion that this isn't a breeder of quarterly disappointments. Snap will need more than a single winning quarter to turn sentiment around, but you naturally have to start somewhere.