Here’s Why Snap Shares Went Into Free Fall After Its Results Came Out

The first earnings report after a closely-watched tech IPO is always a nerve-wracking experience, but the response to Snap’s first quarterly results on Wednesday went beyond just nervousness and crossed over into shock-and-awe territory.

Snap’s share price plummeted by more than 24% following the release of its results, taking the stock to within a hair of $17, the price at which it issued its first shares in **. In all, the company lost almost $4 billion in stock-market valuation in less than an hour.

Why so much negativity? The video-messaging app maker was expected to lose a lot of money in its first quarter, and many analysts were also prepared for it to show slower growth in daily average users. But the results were even worse than expected.

In total, Snap lost $2.2 billion in the quarter, on revenues of just **. That means it lost ** for every dollar of revenue it made during its first three months as a public company. And user growth was **, significantly lower than in the preceding quarter or the same quarter a year ago.

As many other newly-public stocks have discovered, when you have a market cap of ** billion, even a small miss is seen as a huge red flag. And the user numbers likely fueled concern about competition from Facebook and Instagram eating into Snap’s market share.

Instagram has copied virtually all of the major aspects of the Snapchat service over the past year, and has seen fairly dramatic growth in its user base — it recently announced that it added more than ** million users, which is larger than Snap’s entire user base.

Most of Snap’s $2.2 billion loss was a result of stock-option grants that the company gave to its employees, including ** to CEO Evan Spiegel. But the figure was still massive, and represents a real drain on the balance sheet.

The weak user growth is even more of a concern. Snap likes to talk about the engagement levels that its app generates, with users spending an average of about 30 minutes every day on the service, and more than 3 billion “snaps” being uploaded every day. But what many investors like is growth.

The number of daily average users did grow, but the growth rate was smaller than it has been in every preceding quarter, and that’s not the kind of trend that analysts or investors want to see.

In the fourth quarter, for example, daily users grew by **. In the third quarter of last year they grew by **, and in the quarter prior to that they rose by **. The growth in the latest quarter looks especially bad when compared with the same quarter a year earlier, when the user base rose by **.

The company focused on a number of positive aspects of the quarter, not surprisingly. It noted that revenue rose by more than 280% compared with a year earlier, and said it has seen “significant progress” in advertising revenue as a result of launching an automated ad service.

Snap also pointed out that its operating costs fell, in part because it renegotiated its contracts with Google and Amazon, which host most of the videos and images uploaded by Snapchat users.

“I feel we have executed well on our priorities for this quarter, and that we have a strong foundation as we build our business,” CEO and co-founder Evan Spiegel said during some fairly brief comments on the company’s conference call with analysts.

In response to a question about the company’s losses and revenue growth, ** said that Snap is “still in investment mode,” and wouldn’t be sacrificing that to meet any short-term goals. “We are managing this company for the long term,” he said, adding that analysts shouldn’t expect any kind of revenue guidance from Snap in the near future.

Spiegel: pleased with results, engagement, 3B snaps every time… still have a lot of work to do; 156M DAU in the quarter, up 54% globally… search product is exciting, long tail of content, really is a story for everything, surfaces stories by machine learning… significant progress in automating our ad platform… feel we have executed well on our priorities for this quarter, strong foundation as we build our business

Imran Khan: Users spent over 30 minutes per day on average, unique content, friends and family and premium publishers, informed and connected through Our Stories, expert teams curate Snaps around breaking news, entertainment and sports… 250,000 submissions from users around the Oscars which we curated, 21 million global unique viewers… expanded our Discover offering, 55 global partners; custom analysis with Nielsen, 45% of 18-34 year olds are reached every day… engage an audience that research shows is difficult to reach… cornerstone of a great advertising businesss…

Started ad strategy with big brands, Universal more than doubled their spend with us, Snap ads with attachments provide for engagement — can swipe up to view the full trailer or buy a ticket without having to leave Snap… 300% increase in app installs for a client… clients see more time spent by users who come in via Snap, and also higher rates of conversion to purchase… tens of thousands of advertisers using our geo-targeted filters; API and auction in Q4, working hard to scale for advertisers of all sizes… serving some of the largest brands in 24 countries

Drew: Revenues up 286% year over year, strong ad demand, $128.7 in North America, up 259%… 86% of revenues was sold by Snap; hosting costs fell due to new contracts with Google and Amazon… total cost of revenue down 6%… business remains “in investment mode,” nominal losses increased in the quarter — strong balance sheet

Spiegel says company deliberately didn’t do “growth hacking” things like allowing users to add everyone from their address book automatically, focusing more on creativity than DAU growth (dig at Instagram); excited about the momentum… talk about DAU’s in terms of removing some friction for things like filters, people like looking like a puppy (awkward laugh)… we are running the company for the long term, says Drew, so won’t be any revenue guidance coming from Snap… $8 million in revenue from Spectacles… seasonal events in Q4 says Drew, Olympics was a nice bump, college football partnerships, bit of election upside… early adopters are seeing great results from Discover, says Spiegel… Snapchat Shows, video content created just for Snap, not repurposed from the Internet, episodes drawing audiences of over 8 million, excited about that

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