Shares of Snap (SNAP -0.79%), the parent company of Snapchat, started off the year on a high note as they climbed a staggering 28% in February. But the good times didn't last long for the social media company as shareholders dumped the stock throughout the year following fears that the company is losing users.
The nearly yearlong decline in share prices has left Snap's stock down 55%, and the company's failure to significantly grow its customer base means that there's little hope that prices will rebound anytime soon.
Customer growth is slipping
Snap's gains early in the year came after the company released its fourth-quarter results on Feb. 7. Sales increased by an impressive 72% year over year, which surpassed analysts' estimates, and Snap's loss of $0.13 per share was better than the $0.16 loss Wall Street expected. Adding to that good news was the fact that Snap managed to grow its daily active users by 18% year over year, to 187 million.
But that's mostly where Snap's good news ended for the year. The company began a slow decline throughout the rest of 2018. For example, the company's shares tumbled 13% in August after Snap released its second-quarter results. They showed that sales increased by 44% year over year, but Snap had a net loss of $353 million, or $0.27 per share. Most important, the company reported its first-ever decline in daily active users, which dropped 2% sequentially.
The company's stock then took a massive 22% hit in September as Facebook (META 1.18%) and Twitter faced scrutiny from the U.S. government over their platforms' potential to be used by foreign governments to influence elections. Snap's shares got caught up in a broader sell-off of social media stocks as investors worried that the government might regulate these companies more.
As if all that weren't bad enough for Snap shareholders, the company's stock fell another 22% in October as tech stocks tumbled on investor fears over rising interest rates and a trade war between the U.S. and China.
But Snap's results for the third quarter, which were released on Oct. 25, likely contributed to October's share price decline as well. Once again, Snap beat analysts' consensus estimates for both sales and earnings, but lost more daily active users (DAUs). They declined by 1% sequentially, marking the second straight quarter of user losses.
Keep a safe distance
Snap is still a young company, and it should solidly be in user-growth mode right now. The fact that it isn't is a troubling sign. It has fallen victim to Facebook's Instagram, which has successfully copied many of Snapchat's once-unique features -- and has grown by leaps and bounds doing so. That's left Snap trying to find its place in the social media space while users slowly fall away.
I don't expect much of a turnaround for this company anytime soon, especially when you consider that Instagram can easily replicate nearly any new feature Snap releases for its Snapchat app. In fact, some Snap shareholders have started a class action lawsuit against the company, claiming that Snap didn't spell out the risks it faced from competitors like Instagram. Making matters worse, the Department of Justice and the Securities and Exchange Commission are now looking into whether Snap misled investors about its competition.
All of which means 2019 is shaping up to be another rough year for Snap and its shareholders.