Just because Chinese internet giant Tencent (NASDAQOTH:TCEHY) is willing to throw millions of dollars more at vanishing message app maker Snap (NYSE:SNAP) doesn't mean you should follow its lead. The social media platform-cum-camera company reported yet another dismal quarterly earnings performance, and Tencent increased its stake in the company to 12% as a vote of confidence, but there's little to recommend an investment here.
Snap's not crackling or popping
In its third-quarter report, Snap said revenue rose 62% year over year to $208 million, but Wall Street had been expecting as much as $239 million. Worse, losses widened dramatically, going from $124 million last year to a whopping $443 million this year.
Even worse, daily active user growth is stalling and will likely soon turn negative. The number of active users rose to 178 million, up 16% from a year ago, but a far cry from the 63% growth it achieved in the third quarter of 2016. The rate of growth in daily active users has been steadily declining for a year now, and the step down each quarter suggests that within the next few quarters it will be posting declining numbers of users.
Take a picture, it will last longer
Although Snap likes to call itself a camera company, virtually all of its revenues come from advertising. Of the $208 million it took in this quarter, $204 million came from ad sales, meaning only $4 million was from other sources like its Spectacles, the eyeglass cameras that were hot for about 15 minutes.
Snap vastly overestimated the popularity the eyeglasses would have. When Spectacles were first introduced in late 2016, the camera company estimated the augmented reality glasses would sell about 100,000 pairs within a year. Last month, founder and CEO Evan Spiegel said Snap had sold 150,000 pairs, well ahead of the original estimate, but according to a report by The Information, there are hundreds of thousands of pairs sitting in a warehouse collecting dust.
Further (how bad can this get?), like growth in its active user base, Snap's sales of Spectacles are quickly declining. In the first quarter, it sold an estimated 64,000 units at $130 each, which fell to 41,500 in the second quarter. If we divide the $4 million in "other" revenue that Snap generated in the third quarter, we find that it sold fewer than 30,800 units for the period.
Beyond what's looking like a failure for the AR glasses, the other component of Snap's conversion into a "camera company" also appears to be having a rough go of it. After acquiring drone maker Ctrl Me Robotics last year, it attempted to purchase Chinese drone maker Zero Zero Robotics, but that deal apparently fell through because of price.
Little seems to be going Snap's way as rivals like Facebook's (NASDAQ:FB) Instagram copy whatever innovations Snap develops and ultimately do Snap better than Snap. For example, after copying Snap's Stories feature, Instagram ended up adding some 200 million new users to its platform and now has 800 million active users.
A snap decision
So what is it that Tencent sees in Snap that would cause it to acquire an additional 145.8 million shares of the company? The internet company is a long-term owner of Snap stock and told The New York Times the newest investment was a "strategic" one, but don't think that means it might want to buy the company. Snap's corporate structure would likely prevent that from happening, and the shares Tencent purchased for around $2 billion are nonvoting.
It's possible it would want to launch a similar app in China, but that might not be an easy sell as the government has already banned Instagram. Chinese authorities not wanting their people to share photos and Stories amid crackdowns seems to be a high hurdle to get over, particularly if it's for an app where the posts quickly disappear from view, hiding the evidence.
The investment doesn't appear to be enough to alter the thesis that Snap is waning as a preferred app, even if it's still popular with millions of teens. With its business spiraling down, there's little reason to buy its stock.