Snap's disappointing Q3 earnings report released last week underscores the dire straits in which the company, seven years old, still finds itself selling dollars for ninety cents.
For the second sequential quarter, the company has failed to increase the rate of growth and deliver the monetisation performance expected of a fast growth tech company. Quarterly losses grew fourfold year over year with revenue up only 153 per cent on that same period.
In the modern history of technology companies, new category winners are most often created due to innovative product combined with the incompetence or complacency of the largest entrenched competitors in the market.
Google grew exponentially since the turn of the millennium not only due to an exceptional product but also because competitors Yahoo and Microsoft didn’t properly prioritise and resource their search products. They were simply too slow for a nimble, aggressive newcomer like Google. It’s that combination of great product, constant innovation and sleepy competitors that create massive opportunities for disruption and generation changing companies of tremendous value.
Snap, unfortunately has difficulty in both these areas. Most importantly, it has the unfortunate luck of an extremely rich, extremely aggressive competitor, namely Facebook. Ever since the acquisition of Instagram, it has been abundantly clear that Facebook’s management is keenly aware of competitors and can rapidly buy or otherwise outmaneuver them. They’ve clearly taken to heart the aphorism of Intel’s Andy Grove that “only the paranoid survive”.
Despite Snapchat having some very early product innovations that captivated a young North American userbase, Facebook has made it its mission to copy each feature more quickly than the last and remove the unique user proposition Snap offers. Indeed, Facebook is rumoured to have numerous early-warning tracking systems alerting them to fast rising new apps and websites, which Facebook can then closely monitor and then develop competitive products when deemed important.
Looking at the Snap userbase, users do seem to stick around once they’re engaged with Snapchat as measured by daily active and monthly-active users. However the flow of new users to Snapchat has been absolutely crushed as people find the features they want already inside Instagram where they already have a robust social network to start.
Not since Microsoft in the early 1990s has there been such a ruthless competitor in the tech industry waiting to cut down all challengers as soon as they bravely stick their heads up above the trenches.
Snap is not entirely faultless here either as it’s not been able to meaningfully iterate on the product yet. For several years now it’s had very few product improvements and the interface remains challenging for many older users. Its forays into display advertising have not resonated with large ad buyers due to perceived poor performance versus other ad channels. Spectacles have proven to be a flash in the pan, contributing only $5.4m to the latest quarterly earnings and Snap’s newest geographic features have met with a lukewarm reaction to date. Their recent acquisition of Paris’ Zenly could deliver an additional footprint for location-based advertising and future geo-specific product improvements to the core Snapchat app, but so far Snap users have mostly revolted over any sort of location sharing inside the app.
With these financial results, it appears that Snap looks far more like Twitter than the next Facebook or Google. While they could always come back from the brink and launch new products to restore growth, the company appears vastly overvalued for the performance exhibited to date, and when considering its current trajectory of growth and innovation compared to peers.