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Snap's Goal of Profitability Looks Dim

By Rich Duprey – Updated Apr 10, 2019 at 10:05PM

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Delayed app redesigns, fleeing executives and users, and low morale are hampering the company's chances of turning around.

Check out the latest Snap earnings call transcript.

Snap (SNAP -2.90%) CEO Evan Spiegel told employees two months ago that he wanted the Snapchat parent to become breakeven in the fourth quarter of 2018 and turn profitable in 2019. While these were so-called stretch goals, something the company should strive for, the prospects for attaining either look dim.

Rumor has it the company just informed its employees that for the second year running they won't be getting any bonuses. With year-to-date losses running in excess of $1 billion, a revolving door in the C-suite that has seen seven executives depart, and a declining user base, it seems safe to say Snap won't be breaking even when it reports earnings early next year, while the prospects for full-year profitability in 2019 are equally underwhelming.

Woman grimacing while taking selfie

Snap's outlook is getting uglier. Image source: Getty Images.

Falling further behind

Although Snapchat remains very popular, it stumbled by forcing a redesign of the app that caused millions of users to abandon the platform. As a result, Snapchat reported its first-ever sequential quarterly decline in daily active users. Now it's hoping a new design for Android users can turn things around when it finally rolls out.

When that will be remains to be seen, because unlike the previous app redesign he foisted on iOS users, Spiegel says the Android app will only come out when it's ready. The CEO acknowledges that having optimized Snapchat for iOS, it is missing out on a global growth opportunity in Android because about 85% of global smartphone users are on the Android operating system. He promises the redesign will be "lightweight, modular, and performant." 

It was supposed to roll out sometime during the third quarter, but during the earnings conference call, Spiegel admitted, "We still have a bunch of work to do there." So when it will be available is anyone's guess, but Snap really doesn't have much time to dawdle, as at least one analyst thinks it will run out of money before it turns profitable.

Losing sight of what's important

Part of the problem is Snap's inability to decide what it wants to be. It calls itself a camera company rather than the social-media platform its users view it as, and it keeps going off on tangents, such as working on a third version of its Spectacles camera glasses that feature two cameras and will be even more expensive than the last two versions -- which didn't sell well. It's also getting into video programming.

At the same time, Snap needs to persuade older users to give the platform a try, which is a tough sell, because Snapchat highlights vanishing videos, a focus on lenses and filters, and a Stories feed that's not intuitive to navigate. It also needs to stem the hemorrhaging of younger users to Instagram, which has collected over 1 billion daily active users.

While Snap seems to have mitigated the loss of advertisers by changing over to programmatic ad selling, which has helped boost revenue, it has simultaneously cut the knees out from under pricing, and that will only worsen if it can't gain more users.

Pulling on the thread

Everything is intertwined like some tottering Jenga game, where pulling out one block could send it all crashing down. Snap's stock has already plummeted, and for a brief moment it even traded under $5 per share, as the market doubted it will be able to stabilize before it becomes undone.

Can Snap turn itself around? Certainly, but with low morale among employees, executives who are running for the exits, delayed product rollouts, a misguided focus on what's important, and users who are giving up on the experience, things don't look so good right now. 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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