The Spectacle Of Snapchat: Why Investors Keep Faith Despite Lack Of Profit

Snapchat's parent company, Snap Inc., has been described as a bad investment despite its popularity. Since its IPO in 2017, the company has struggled to turn a profit, with its quarterly profits being described as a fluke or one-off occurrence. Despite this, the company has been valued at over $24 billion, with its shares trading at around $25 each, giving it a market value of about $32 billion. This discrepancy between popularity and profitability has puzzled investors and analysts alike, with some attributing it to the company's lack of voting rights for public shareholders and the toxic environment it creates, while others speculate that Snap's innovative ideas and ability to capture the imagination of its users will eventually pay off.

Snapchat's poor financial performance

Snapchat's parent company, Snap Inc., has had a tumultuous financial history since its initial public offering (IPO) in 2017. Valued at $24 billion, the company has yet to turn a profit and has faced significant challenges in its attempts to do so.

One of the main issues contributing to Snapchat's poor financial performance is its struggle to monetise its large user base effectively. Despite having 400 million daily users at one point, the company has failed to translate this into substantial revenue. While it makes some money from advertising and the sale of its Spectacles product line, these efforts have not significantly impacted its bottom line.

In its most recent fiscal year ending December 31, 2016, Snap Inc. reported a loss of $500 million, following a loss of $372 million the previous year. The company has also faced executive exodus, including multiple chief financial officers, and a disastrous redesign of its signature app that halted user growth. As a result, shares now trade 30% below the listing price.

Another factor affecting Snapchat's profitability is the intense competition it faces from larger rivals like Facebook and Instagram. Facebook has aggressively copied Snapchat's most creative features, such as selfie filters and disappearing stories, and implemented them on Instagram. This has caused a decline in Snapchat's user numbers and made it difficult for the company to attract new users.

Despite these challenges, Snap Inc. has taken steps to tighten its grip on finances and improve its financial situation. The company has lowered barriers for advertisers, moving to an automated platform, and cut prices. These efforts have helped increase revenue to $1.2 billion in 2018, even as user numbers have stalled.

However, Snap Inc.'s ability to raise user numbers is crucial to its long-term profitability. The company needs to attract older users while also finding ways to innovate and capture the imaginations of its existing users. With intense competition from big spenders like Facebook, Apple, and Alphabet, Snap Inc. has its work cut out to turn a profit and avoid running out of cash.

The impact of the executive exodus

Snap Inc. has been struggling to retain its top executives, which has had a significant impact on the company's performance and investor confidence. The departure of key figures has likely contributed to the company's ongoing challenges in becoming profitable and maintaining user engagement.

One notable exit was that of Chief Financial Officer Tim Stone, who left the company less than a year after joining. Stone's appointment was expected to boost Snap's e-commerce drive and steer the company towards profitability. However, his sudden departure sent Snap's shares tumbling, with a 9.48% drop in pre-market trading. Stone's exit was a blow to investors, as it reflected the company's inability to retain its top talent.

Other notable departures include Nick Bell, vice president of content, and Kristin Southey, vice president of investor relations. Bell played a crucial role in building media partnerships and creating original content for Snap's mobile platform. Southey, on the other hand, left the company after just four months, citing personal reasons.

The exodus also included Steve LaBella, who oversaw the company's marketing campaigns for over two years, and Kristen O'Hara, a former WarnerMedia executive who left after the company's CEO withdrew a job offer. Additionally, Imran Khan, Snap's chief strategy officer, stepped down to spend more time with his family and to pursue an e-commerce startup.

The loss of these executives not only disrupted the stability of the company but also likely impacted its strategic direction and operational effectiveness. The frequent leadership changes may have contributed to the company's struggles in adapting to the evolving social media landscape and addressing the needs of its creators and influencers.

The executive exodus at Snap Inc. highlighted the challenges the company faced in retaining top talent and maintaining a consistent vision. This instability likely contributed to investor concerns and may have further exacerbated Snap's difficulties in achieving profitability and sustaining its competitiveness in the dynamic social media industry.

The failure to innovate and keep up with competitors

Snapchat's failure to innovate and keep up with competitors has been a significant concern for investors. While Snapchat once led the market with its unique features, it has since struggled to keep up with larger companies like Facebook and Instagram, which have replicated and built upon Snapchat's ideas. This has resulted in a decline in Snapchat's user growth and revenues, with competitors outperforming them.

One of the main issues has been Snapchat's inability to innovate and adapt quickly enough. For example, in 2017, Snapchat rolled out a new interface that received severe backlash from users, with nearly 1.3 million signatures on a petition to rollback the update. The redesign included changes such as separating user-created stories from those of celebrities and brands, mixing stories with chats, and algorithmic sorting. However, these changes seem to have made the app more confusing and less intuitive for users, with features that went against the product's original vision. As a result, Snapchat's user growth and advertising revenues suffered, and they were forced to announce a plan to redesign and rollback some of the changes.

Additionally, competitors like Facebook and Instagram have been quick to copy and improve upon Snapchat's key features. Instagram Stories, for instance, followed the same format as Snapchat, allowing users to view a friend's "story" for 24 hours. This feature quickly gained popularity and surpassed Snapchat in terms of daily active users. Facebook has also integrated similar features, such as stories and ephemeral photo messages, directly competing with Snapchat's unique offerings.

Snapchat's struggle to innovate and adapt has led to a decline in its competitiveness. While it once had a unique position in the market, it now faces stiff competition from larger and more established companies. This has made it challenging for Snapchat to maintain and grow its user base, which is crucial for attracting advertisers and generating revenue.

To survive and succeed in the highly competitive social media landscape, Snapchat needs to focus on innovation and differentiate itself from its competitors. It needs to find ways to offer unique and compelling features that cater to its users' needs and preferences while also exploring new revenue streams beyond advertising and user monetisation. Without a strong focus on innovation, Snapchat may continue to lag behind its competitors and struggle to turn a profit.

The lack of control for investors

Snapchat's co-founders, Evan Spiegel and Bobby Murphy, have retained a significant amount of control over the company, holding roughly 97% of the voting rights. This control has made some investors uneasy, as it limits their influence over the company's direction. The co-founders' majority voting rights mean that they can make decisions without seeking approval from other shareholders, including covering the costs of operating an aircraft owned by Spiegel, which has been questioned as a questionable luxury for a business with negative operating cash flow.

The company's decision to sell non-voting shares to the public has further reduced the control of investors. The B shares, held by certain executives and early investors, have one vote per share, while the C-class shares, held exclusively by the co-founders, have 10 votes per share. This structure gives the co-founders a significant advantage in terms of decision-making power and can create a toxic environment, as management may fail to recognize that they are accountable to the shareholders.

The lack of voting rights for the majority of investors means that they have little say in the company's direction and are unable to hold management accountable for their decisions. This dynamic can be problematic, especially when the company is facing financial challenges, as is the case with Snapchat's struggle to achieve profitability.

The co-founders' tight grip on control has potentially deterred other tech founders from seeking similar voting rights. For example, Lyft opted for dual-class shares, but its founders did not seek the same level of control as Spiegel and Murphy. Anne Sheehan, chair of the Securities and Exchange Commission's Investor Advisory Committee, noted that Snap's share class arrangement is likely to remain a one-off, as it pushed the issue to the extreme.

While investors may be attracted to Snapchat's potential for growth and innovation, the lack of control and influence over the company's direction could be a significant concern. This dynamic could impact their confidence in the company's ability to achieve profitability and may influence their decision to invest or divest.

Snapchat's future prospects and potential turnaround

Despite its challenges, Snapchat has several strengths that could contribute to a potential turnaround. The company has a significant user base, with more than 186 million daily users, and is still popular, particularly among younger demographics. Snapchat also has a history of innovation, with features such as augmented-reality rainbow-vomiting clouds that were an instant hit. Additionally, Snapchat has a strong financial position, with over $1 billion in cash and marketable securities, and a current ratio (current assets to current liabilities) of 8:1, indicating strong liquidity.

In conclusion, Snapchat's future prospects depend on its ability to increase its user base and revenue, cut costs, innovate, and compete with larger rivals. While there are no guarantees, if Snapchat can successfully execute on these fronts, it may be able to turn its business around and become profitable in the coming years.

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