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Was Snap's First Earnings Report Worse Than That Of Facebook and Twitter?

Shares of Snap Inc. SNAP opened more than 21% lower on Thursday after the app maker’s first earnings report as a publicly-traded company failed to impress investors. For believers in the Snap vision, this first report was a harsh reminder that nothing comes easy in the fierce tech sector.

Snap reported a loss of $2.31 per share, much wider than the year-ago quarter’s loss of just 14 cents. This tough year-over-year comparison was a result of stock compensation expenses related to the IPO. Nevertheless, the loss was slightly narrower than the Zacks Consensus Estimate—which factors in stock-based expenses—calling for a loss of $2.33.

The company was also able to surpass our revenue expectations, reporting quarterly results of $149.65 million against our consensus estimate of $146.42 million. These quarterly revenue figures were up 286% year-over-year (also read: Snap Plummets Following First Earnings Report, Stock Nears IPO Price).

Snap also said that daily active users (DAUs) were up 36% to 166 million, while average revenue per user (ARPU) was up more than 180% to 80 cents.

Nevertheless, investors were deeply concerned with the increased costs associated with these improvements. Cost of revenues increased two-fold to $163.4 million, and hosting costs per DAU moved 10 cents higher to 60 cents.

Snap also noted that operating expenses increased 18% on a quarter-over-quarter basis to $196.2 million, mainly due to global scaling and acquiring new engineering talent. The company shelled out about $805.9 million on research and development this quarter, although after adjusting for stock-based compensation and depreciation, R&D costs were only about $78 million. Still, that figure was more than its entire operating expense last year.

But to be totally fair to Snap, investors that are planning on holding this stock for a long time probably aren’t concerned about these initial results. If you are long on Snap now, it’s because you believe in what the company can do in the future. Heck, Snap’s first report wasn’t even that bad if you compare it to the first reports of social media rivals Twitter TWTR and Facebook FB.

Shortly after its historic IPO in 2012, Facebook reported a loss of 8 cents per share, which was down significantly from its 11 cent per share profit in the year-before quarter. An adjusted profit of 12 cents per share did match analysts’ expectations, however.

Back then, investors’ concerns about Facebook were comparable to the concerns we have about Snap now. Sure, Facebook had proven its ability to grow users, but could it effectively monetize that user base? We know the answer to that question now, but shares of Facebook fell more than 12% on the day after its first report.

Twitter suffered an even tougher fate. The micro-blogging platform actually beat adjusted earnings and revenue expectations, posting a profit of 2 cents per share and revenues of $242.7 million. Analysts were expecting an adjusted loss of 2 cents per share on revenues of $217.82 million.

However, the company only added 9 million total users in the quarter, with only 1 million of those users coming from the U.S. What’s worse, timeline views were down on a sequential basis. The stock tumbled more than 24% on the following day.

Sure, shares of Snap are down about 20% today. That’s a brutal blow. But we’re talking about whether the company can cut spending and more effectively monetize—that’s much more similar to what we were talking about with Facebook, not Twitter, a company that was already seeing slumping user growth.

There’s clearly a long road ahead of Snap, and even if its first report reminds us of Facebook’s, it will be hard-pressed to mimic Facebook’s long-term success. That’s also ironic because Facebook is probably its biggest obstacle in achieving that success.

Nevertheless, all hope is not lost. A first earnings report does not define a company, and we should know that by now.

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