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Snapchat Is Having a Crisis of Confidence. So Are Investors.

Let's not mince words: Eight months after Snapchat went public, the company is a disaster.

Parent company Snap Inc. on Tuesday turned in its third earnings report as a public company, and for the third time its shares tanked when both revenue and user growth were disappointing. Snapchat also disclosed it would change the fundamental character of its app -- the sole significant revenue source -- to make it easier for people to use.

This might be a good idea, but Snapchat CEO Evan Spiegel said this decision "will be disruptive to our business in the short term." Mind you, when Snapchat was pitching itself to public company investors, the fact that the app was befuddling to many people older than 30 was cited as a feature, not a weakness than needed a serious revision.

Worst of all, the business is not growing as much as a company valued on growth needs to grow. Snapchat said its revenue jumped 62 percent in the third quarter from a year earlier. While that would be insanely great for most companies, Snapchat has only been selling smartphone advertisements for about three years, and investors have been disappointed that the growth rate hasn't been faster lately.

The company acknowledged its shift to sell more advertisements through computerized auction pushed down the prices of its ads. But this pricing effect should have been obvious to any company in the digital-advertising business.

One number shows Snapchat's relatively disappointing pace of sales. On average in the third quarter, each person using Snapchat daily generated $1.17 in revenue for the company. For comparison, Facebook in the same period generated an average of $7.67 in revenue for each of its more than 1.3 billion daily users worldwide.

That gap to Facebook's average revenue per user is Snapchat’s opportunity but also a sign of how far the company has to go. Very far. The average revenue per user increased 39 percent in the third quarter from a year earlier, down from a growth rate of 110 percent three months earlier.

Given what Snapchat said on Tuesday, it's not clear it is confident in its own strategy. This is stunning, because until now Spiegel has seemed utterly sure of what he was doing and didn't seem to care what Wall Street or other outsiders thought. Investors' expectations need a significant readjustment (down), and it's not clear when Snapchat might move past the disruption to its business caused by what promises to be a drastic overhaul of its single important product.

Yes, it's true that Snapchat is a young company that is just getting started along the path trod by Facebook and Google, which have turned human attention into massive advertising sales machines. In theory that gives the company time to mature and settle on its strategy, but not too much time. Snapchat's $18 billion valuation (until now) implies an expectation it can translate promise into big-ticket revenue and profit sooner rather than later.

I have argued previously that Snapchat wasn't doing enough to help outsiders understand the company and its financial prospects better, and CEO Spiegel said recently that he realizes he needs to communicate more with his employees and the investment world. He better do a lot more of that, and fast.

To Snapchat's credit, the world's changing habits are creating wind at the company's back. Young people are watching far less TV in many large economies, and many technology companies are offering TV-loving advertisers alternative options to pitch their soft drinks and SUVs on something that looks like TV but isn't. Snapchat has already capitalized on young people's tendency to spend nearly all of their time tapping on smartphones, and it's also well suited for those TV-replacement dollars that Facebook, Google, Twitter and many other tech firms also want.

Right now, though, Snapchat seems like a company adrift at a point when it absolutely should not be adrift. The company doesn't sound confident in what it's doing, and investors shouldn't be either. It was only a few months ago that Wall Street forecast Snapchat would generate more than $1 billion of revenue this year. Three-quarters of the way through 2017, Snapchat has posted $539 million in sales.

If Snapchat's maturation into a serious player in digital advertising is merely delayed, the company should be fine eventually and investors will stop panicking. On the other hand, it's possible Snapchat's crisis of confidence is an early sign that Snapchat’s advertising market is more limited than previously thought.

When I first saw Snapchat's financial disclosures earlier this year, I was surprised a company with relatively little revenue, a scant track record and enormous financial losses was trying to go public. I'm even more surprised today that Snapchat is a public company. It's certainly not a successful one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Snapchat and Facebook calculate their average revenue per user differently. Snapchat reports average revenue for each daily user, while Facebook reports the average revenue per monthly user. For comparability, I'm applying Facebook's methodology to its average daily user disclosures.


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