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Can Snap Bounce Back from Its Disastrous First Earnings Report?

The buzz surrounding Snap Inc.’s SNAP first earnings report on Wednesday was something Wall Street hadn’t seen in a while. As the day started to wind down, investors—frankly, everyone—grew more excited. How was Snap going to perform? Was the biggest U.S. tech company to IPO since Facebook FB going to surprise or disappoint?

It was the latter, unfortunately. Or gleefully, if you like to just watch things burn. After Snapchat’s parent company released its first-quarter earnings, SNAP stock plummeted about 20% in after-hours trading. But it kept falling, hitting as low as 25% to $17.12 per share at 4:38 PM EST before rebounding slightly; Bloomberg notes that Snap co-founders Evan Spiegel and Bobby Murphy lost more than $1 billion each as a result.

Even today, shares of Snap have yet to recover, and they’re down over 21% to $18.08 per share in afternoon trading.

Breaking Down Snap’s Earnings

For Q1, Snap reported earnings of a loss of $2.31 per share, just edging out the Zacks Consensus Estimate of a loss of $2.33 per share but reflecting a much wider loss compared to the year-ago quarter. Overall, Snap lost $2.2 billion, compared to a loss of $104 million in the prior year period.

This disappointing loss was primarily due to stock compensation expenses related to its recent IPO back in March, which inflated overall costs and expenses. But it can also be attributed to the “CEO award” that Snap investors gave to Mr. Spiegel as a reward for taking the company public. According to CNBC, Spiegel’s award is valued at over $550 million, and there is apparently another $1.1 billion in employee stock awards that “would kick in after the IPO.”

Revenues came in at $149.6 million, which also beat our consensus estimate of $146.42 million and jumped 286% year-over-year. Sequentially, total sales were down 10%, and this may be due to a seasonal impact on advertising, and as we know, advertising makes up the majority of Snap’s revenues.

User growth was solid for the quarter. Snap’s daily active users spiked 36% year-over-year to 166 million, while average revenue per user (ARPU) improved 90 cents from 32 cents recorded in the first quarter of 2016. On a sequential basis, however, DAUs only increased 5%, while ARPU declined 14% from $1.05 in the prior-year period.

For more on Snap’s earnings, read: Snap Plummets Following First Earnings Report, Stock Nears IPO Price & Snap Q1 Loss Widens, Shares Drop in Slow User Growth

Can Snap Bounce Back?

An important thing we all should consider is whether or not Wall Street overreacted to Snap’s first earnings report. If you look at how shares of Facebook and Twitter TWTR reacted after their initial earnings results came out, you’ll see that Snap and its stock behaved fairly similarly. FB and TWTR stocks were down 12% and 24%, respectively, the day after their reports came out. But investors are clearly worried about the tech company’s future, and that $2.2 billion loss, no matter how much of it was due to stock based compensation expenses, will be a hard figure to overcome.

Looking ahead, it’s vital that Snap grow its user base. The company showed a decent uptick this quarter on a year-over-over-year basis, but sequentially, user growth seemed to be slowing down. This could be because of Facebook’s incredibly popular Snapchat-like feature it launched in its Instagram app, Instagram Stories. Arguably its biggest rival, Instagram Stories mimics Snapchat Stories in name and platform, allowing users to pose photos and videos that disappear after 24 hours.

One way to grow its user base would be to vastly improve its app for Android users, something that Spiegel commented on in the company’s call with analysts after its earnings report. Because the majority of its users are on iPhones, the company prioritized their development for Apple’s AAPL iOS operating system over Alphabet’s GOOGL Android.

"We had a really tough time with Android. That's still showing up in the numbers," Spiegel said. "We're making progress, but it's taking time." Android users almost doubled for Snap this past quarter, jumping from 20% of its new users to 30%, and going forward, the company is planning on making significant changes to the Snapchat experience on Android.

Another way Snap could boost its user count is through its new television venture. According to a report from The Wall Street Journal, Snap apparently has several deals in place with major media companies like Comcast CMCSA and Disney DIS to deliver content for its new live TV concept. This television-like platform will feature three to five minute shows made exclusively for Snapchat.“TV is dead for the teens,” said Imran Khan, Chief Strategy Officer, on the analysts’ call. Will they turn to Snap instead?

The one thing Snap has that Facebook doesn’t is the loyalty of Millennials and teenagers, two age demographics that advertisers covet. People who use Snapchat love Snapchat, and the app still has that “cool” factor that leads it to be featured at high profile events like the Oscars and the Olympics.

Can Snap bounce back? Most likely, yes. Spiegel said that there are 3 billion Snaps created daily, certainly an impressive figure and a testament to how much the app still resonates with its core user base. But Snap needs to expand that center, and demonstrate to investors that it is more than just copycat fodder for Facebook.

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