When it comes to building a business, investors, advisors, and board members may warn founders of growing too quickly. While this sounds a little convoluted, the root of the argument is that before a company explores developing a new product or pursuing additional end markets, it should perfect its core services first. It's also a polite way of telling founders not to lose focus.
Snap (SNAP 27.63%) originally became an overnight sensation in the social media world for its fun, playful photo-disappearing app. But over the years, Snap has developed into more than just an addicting way to share photos and videos. Snap is evolving into an augmented reality company, serving the needs of content creators and advertisers alike.
However, the company's latest quarterly earnings were a mixed bag at best. While there were some interesting points around the shape of the business, the numbers don't lie.
When it comes to Snap, there really only seems to be one thing that doesn't disappear: its problems. Let's dig in and assess the situation.
Don't fall for the AI mirage
In its Q2 shareholder letter, Snap's management pointed to three areas to return to revenue acceleration. The company seems committed to investing in new products and services to increase engagement and return on investment for advertisers on the platform.
While this is nice to hear, it's also stating the obvious. If Snap is not able to generate high engagement on the platform, users will go elsewhere. And if users leave the app, advertisers don't have much reason to spend money on the platform trying to reach people.
Management went into detail about new products leveraging artificial intelligence (AI), including a chatbot to help users discover features on the platform. Furthermore, Snap's augmented reality features appear to be really focused on virtual try-on services. The goal of this technology is to help advertisers create differentiated experiences, increase sales throughput, and reduce product returns.
Admittedly, these services are intriguing. But given the company's financial profile, it seems as if Snap may be getting desperate, throwing more money at a bigger problem.
Image source: Getty Images.
Too little, too late?
Purely from a numbers standpoint, the likes of Microsoft, Alphabet, Amazon, and Meta Platforms have a combined $395 billion of cash and equivalents on the balance sheet as of the June quarter. By comparison, Snap has $3.7 billion. So it's hard to imagine how the company can really compete.
Another reason Snap's challenges seem to be mounting revolve around engagement. For the quarter ended June 30, the company boasted record active advertisers on the platform, with a 20% year over year increase. Although this seems encouraging, there's a catch.
In Q2, Snap reported total revenue of $1.1 billion, which represented a 4% decline year over year. To make matters worse, the company estimated Q3 revenue to be in the range of $1.07 billion to $1.13 billion, which would represent a year-over-year 5% decline to no change.
With such a dismal outlook, investors should be wondering what is going on. As a proxy, looking at other social content companies such as Meta and Alphabet, which both derive revenue primarily from advertising, could prove useful. Meta, which operates Facebook, Instagram, and WhatsApp, saw advertising revenue grow 12% year over year in Q2. Furthermore, Alphabet's advertising revenue grew 3% year over year in Q2.
When comparing these cohorts, it looks like Snap is losing market share to its larger competitors. During a recent interview on CNBC, Wedbush Securities technology research analyst Dan Ives echoed this sentiment. Ives went on to say that if you were to look up the word "disaster" in the dictionary, you would find Snap's ticker symbol.
What should investors do?
First and foremost, investors should not be enamored with the stock's 18% year-to-date return. With such poor performance as a business, it's hard to understand logically why the stock is up so much this year. Amid the hype around AI for much of 2023, tech stocks in particular have enjoyed outsized returns disconnected from underlying fundamentals.
Given the company's increasing investments during a prolonged period of revenue decline, it's difficult to justify Snap stock as a buy. On one hand, the stock is down more than 85% from its highs in late 2021. But on the other, experience has taught that much market activity during the last few years has been fueled by meme-stock mania and overly euphoric, emotional reactions to even the slightest hint of positive momentum.
Therefore, as an investor looking for exposure to AI or social-media content companies specifically, there are likely safer blue chip options at the moment.
