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Snap’s in Trouble

Snap (Nasdaq: SNAP) has disclosed that Chinese tech behemoth Tencent (OTCMKTS: TCEHY) owns some 145 million of its common shares—which carry no voting rights—through an affiliate, good for a 12 percent ownership. Before you get too excited (if you own SNAP), keep in mind that Tencent makes all sorts of investments in the U.S., and the investment doesn’t necessarily mean it intends to take over the struggling Snap.

The ownership could be a precursor to some kind of partnership, however, and Snap may need this partnership to have a fighting chance, because on its own things are not looking good. Back in 2014, Snap founder Evan Spiegel, infamous for hubris, reportedly had turned down an investment deal from Tencent by asking for way too much. Now, if Spiegel were to sell, chances are the price tag will be but a small fraction of what he could have gotten three years ago.

The latest quarter was another bad one for Snap. While third-quarter revenues increased by 62 percent to $207.9 million, it pales in comparison to the preceding quarter’s 153 percent growth. Expenses remained sky high. The company incurred an operating loss of $461.8 million, up from the second quarter’s $449.0 million loss. The biggest negative was that the key metric, user growth, was once again below expectations. The daily-user count for the Snapchat app grew to 178 million, up 4.5 million from the second quarter, but The Street was looking for approximately 182 million.

Since the company primarily makes money through ads, slowing user growth is not a good trend, particularly as its app’s once unique features have been copied by juggernaut Facebook’s (Nasdaq: FB) Instagram, which had 500 million daily active users. Facebook, by the way, had tried to buy Snapchat for $3 billion in 2013 but was rejected. Now it’s eating Snap’s lunch.

Going Gray

Spiegel announced that Snap will redesign the app to “make it easier to use,” in what appears to be an effort to attract new users—the slightly older folks. Part of Snapchat’s appeal to young people, however, is that its non-conventional design distinguished it from the likes of Facebook, which over time began to attract parents and grandparents, making it less “cool” to the younger crowd. In fact, a major overhaul of the app could end up alienating some of its current user base.

Snap acknowledged that the redesign will probably be disruptive to its business in the short term and it doesn’t know how the update will change the behavior of its user community. The redesign looks like a desperate move to shake things up because status quo isn’t working.

Tunnel Vision

Symbolic of its problems, Snap disclosed that included in the $449 million loss in the third quarter was nearly a $40 million on Spectacles, sunglasses equipped with a camera that worked with Snapchat. These gimmicky sunglasses were supposed to be one main way to diversify revenue source, but they failed miserably. Management badly overestimated demand and there are hundreds of thousands of unsold units sitting in warehouses.

One of the hottest IPOs this year, SNAP has been a flop. The stock dove more than 14 percent in reaction to the third-quarter results and the future looks murky, to say the least. Outside help looks like its best chance.





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