Snap shares at new low

Here are three goals the mes­sag­ing app maker must hit to win over skep­tics be­fore next earn­ings re­port.

Los Angeles Times - - BUSINESS - By Paresh Dave

Shares of the Los Angeles com­pany that makes the Snapchat mes­sag­ing app breached an all-time low Fri­day, fol­low­ing weaker-thanex­pected sec­ond-quar­ter fi­nan­cial re­sults.

They closed at $11.83, down 14.1%.

Snap Inc.’s mar­ket cap­i­tal­iza­tion now sits at about $14 bil­lion, or about how much ven­ture cap­i­tal­ists thought the com­pany was worth a cou­ple of years ago when Snapchat had 100 mil­lion users.

Snapchat counts 173 mil­lion users th­ese days. But the in­crease has come too slowly in the minds of in­vestors, who have equated choppy user growth with di­min­ished money-mak­ing po­ten­tial for the un­prof­itable com­pany.

Snap Chief Ex­ec­u­tive Evan Spiegel, who to­gether with his co-founder has enough vot­ing con­trol to di­rect the firm’s fate, says lit­tle has changed in their cal­cu­lus. Nei­ther plans to dump stock any­time soon, and the com­pany has waved off ru­mors of a po­ten­tial $30-bil­lion ac­qui­si­tion of­fer from Google.

Spiegel told fi­nan­cial an­a­lysts Thurs­day that he’s “very ex­cited” about up­com­ing fea­tures — which Snap is count­ing on to main­tain user in­ter­est — and that em­ploy­ees are “hav­ing a great time” work­ing on the ideas.

But Wall Street may want re­as­sur­ances that are a bit more con­crete. Here are three things the Snapchat maker must show three months from now when it re­ports earn­ings — er, losses — for the July-to-Septem­ber pe­riod.

Stay­ing es­sen­tial as Face­book holds lead

Snap said Thurs­day that about 25% of smart­phone own­ers in the U.S. are Snapchat users. Face­book has about 80% pen­e­tra­tion, ac­cord­ing to third-party mea­sure­ments, sug­gest­ing that Snapchat has plenty of room to grow.

An­a­lysts such as Ralph Schackart at Wil­liam Blair have sug­gested in­vestors should wait it out as Snap cap­tures more in­ter­est.

“Snap’s slight miss on daily ac­tive users and rev­enue should not ma­te­ri­ally

change the bull or bear de­bate on the com­pany,” Schackart said. “We are en­cour­aged by the com­pany’s early ef­forts to in­crease en­gage­ment and con­tent cre­ation on the plat­form through new prod­ucts and fea­tures.”

But Snapchat isn’t as es­sen­tial an app for many adults as Face­book, and it has long drawn com­plaints that its fo­cus on cre­at­ing posts ver­sus con­sum­ing them makes learn­ing the app com­pli­cated.

School and the foot­ball sea­son start­ing pro­vide tail­winds that could pro­pel in­ter­est in Snapchat as peo­ple en­counter new friends and dial into sports high­lights. If the pen­e­tra­tion fig­ure doesn’t budge in the next earn­ings re­port, that could put a wrin­kle in Snap’s po­si­tion­ing as a com­ple­ment to Face­book.

Gen­er­at­ing steady ad­ver­tis­ing growth

An­a­lysts said Thurs­day they were glad to see that Snap is gain­ing more money from the same clients.

Snap gen­er­ated 142% more rev­enue dur­ing the first half of 2017 than the first half of 2016 from ad­ver­tis­ers who bought an ad dur­ing that span last year. The fig­ure counted spend­ing by the same par­ent com­pany, mean­ing a new di­vi­sion of a con­glom­er­ate giv­ing Snapchat ads a whirl this year would have counted in Snap’s fa­vor.

But ex­perts aren’t im­pressed that Snap can’t gen­er­ate steady sales growth — “there is lit­tle ex­cuse at this late in the game,” James Cak­mak of Mon­ness, Crespi, Hardt & Co. said ahead of the earn­ings re­lease.

“We’ve de­fended Snap since Day One, but now need to see mon­e­ti­za­tion mov­ing in the right di­rec­tion,” Cak­mak said.

Snap could win over skep­tics if its ef­forts to pro­vide train­ing, soft­ware and dis­counts to small busi­nesses turn into a solid pipe­line of ad buys.

Keep­ing sales in line with costs

Snap warned that its tech­nol­ogy costs rose in the last part of the sec­ond quar­ter as users flocked to a new, data-in­ten­sive fea­ture, Snap Maps.

The com­pany hasn’t put ads in Maps, which high­lights the lo­ca­tions of a user’s friends and in­ter­est­ing lo­cales around the world. Snap is new to plac­ing ads in World Lenses, the 3-D, dig­i­tal sketches that in­clude the In­ter­net celebrity known as Dancing Hot Dog.

Spiegel teased up­com­ing fea­tures tied to its dig­i­tal stor­age locker for posts, Mem­o­ries, where there also aren’t ads.

If users spend in­creased amounts of time in th­ese fea­tures but don’t en­counter ads in th­ese sec­tions, Snap’s costs could soar. That’s not a prob­lem for Face­book, which of­ten holds off on in­tro­duc­ing ads as long as pos­si­ble be­cause it has more than $35 bil­lion in cash and short-term in­vest­ments.

Hold­ing off on plac­ing ads is more dif­fi­cult for Snap, which has $2.8 bil­lion in cash and mar­ketable in­vest­ments. Spiegel ex­pressed con­fi­dence the com­pany could bring ads through­out the Snapchat in­ter­face. Until the com­pany demon­strates ads in new sec­tions are valu­able, an­a­lysts and in­vestors are left to do a lot of guess­work and po­ten­tially bet on in­creased losses.

“As a very early-stage com­pany, Snap re­mains in­cred­i­bly dif­fi­cult to value vs. other com­pa­nies in our cov­er­age uni­verse,” Piv­otal Re­search’s Brian Wieser said Thurs­day.

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