Snap's stock drops 24 percent following disappointing Q1 earnings

Snap Inc. is experiencing serious financial troubles since it went public in March.

As of May 10, the company’s stock price fell more than 24 percent in pre-market trading. The company has lost nearly $6 billion in market capitalization. The drop in stock price is a result of the recent first quarter financial earnings report Snap released on May 10, its first report as a publicly owned company.

Most of the company’s key metrics were below investors’ estimates. Snap achieved revenue of only $150 million, compared to estimates of $158 million. It also added fewer users than expected, and currently has net losses totaling $2.2 billion, of which $2 billion are stock-based compensation costs.

Some investors worry that Snap may have the same problem as Twitter Inc. Both companies had a larger-than-expected initial public offering debut, but Twitter started to report slower growth each quarter and failed to grow its user base, especially compared to its rivals Facebook, Google and Instagram.

Twitter’s original IPO closed on its first day at $44.90, about 73 percent above its current IPO price, with a market cap of $25 billion. As of press time, Twitter is now trading at $18.46 and has a market cap of roughly $13 billion.

The company could not compare to rivals like Facebook and Google, which had larger user bases, more engaged users and more advertisers willing to pay for space on their websites. Since its IPO, Twitter has never returned a profit and has lost $2 billion since 2011, according to CNN. Much like Twitter, Snap has never turned a profit, experiencing both net losses and negative cash flows since the company began operations in 2011. It has even warned investors that it “may never achieve or maintain profitability.”

Snap, which brands itself as a camera company, owns the popular Snapchat application, which allows users to send disappearing video and photo messages, use augmented reality filters to overlay graphics on the real world and show snippets of your day to all your friends within a 24-hour period using the “Stories” feature. With these core features, the company has tried to sustain its goal of attracting a loyal consumer base in the younger generation.

However, these features, and Snap’s growth in general, face a problem in the form of Facebook. Facebook, the world’s largest social network, is arguably Snap’s largest competitor, with almost 1.9 billion users compared to Snapchat’s 166 million. In 2013, Facebook CEO Mark Zuckerberg made a proposal to purchase Snapchat from CEO Even Spiegel for $3 billion, which Spiegel turned down.

Facebook’s strategy when it comes to innovation is usually to buy rival companies outright. This is what led to its acquisitions of Instagram, a photo-sharing application, WhatsApp, a messaging application and Oculus VR, a virtual reality company.

Today, Facebook has adopted a different strategy. The company has copied many of the key features that have driven user growth for Snapchat. For example, last year Instagram copied Snapchat’s “Stories” feature. Earlier this year, Instagram reported that its “Stories” feature had 200 million daily active users, more than the 158 million daily active users that Snapchat has. This means that a simple function of Instagram has a larger user base than the entire user base of Snapchat.

When Snap filed its IPO, investors learned that Snapchat’s growth had dropped 82 percent since Instagram launched its “Stories” feature. Messenger, WhatsApp and the main Facebook app have all added a feature similar to “Stories” in their repertoire. More recently, other features of Snapchat have also been copied, including its augmented reality filters and cameras. Instagram has also added a messaging feature called “Direct”, which was inspired by Snapchat.

This strategy has worked fantastically for Facebook. At the end of last month, Instagram had reached 700 million monthly active users, and its growth rate is actually speeding up. According to TechCrunch, a spokesperson for Facebook stated that the release of Snapchat clone Instagram Stories had helped fuel this expansive growth.

Facebook has also done well branching out of the United States, reaching international markets. Instagram has focused on developing versions of its app for users who cannot afford data plans or have weak cellular connections, which is much of the international user base. It has also focused on providing features for Android users, including an offline mode and a smaller app download size.

Snap, on the other hand, is focused on adding users in only the most-developed markets, arguing that those users will be more profitable than if the company tried to add users internationally. Snap also has a subpar app on the Android platform compared to iOS. In the company’s SEC filing, it revealed that the majority of the Snapchat application’s users are on iPhones, so iOS app development was prioritized over Android. However, about nine out of 10 smartphones use the Android OS, so Snapchat has started to focus on improving that platform’s app. As a result, Android users have nearly doubled for Snapchat last quarter, but there is still room for improvement.

Only time will tell how Snapchat will fare against the behemoth that is Facebook and its acquisitions, but its first quarterly report as a public company does not paint it in a positive light.