It has plush offices in Venice Beach, the hot-body capital of Los Angeles. It makes a cool smartphone app for kids that is utterly baffling to their parents. It’s run by a multibillionaire 27-year-old. So does Snap, the start-up behind the Snapchat messaging app, have all the ingredients to be the next big thing in tech?
Not yet, if ever. We are now three dismal earnings reports on from Snap’s overhyped float in March and much of the glitter has been rubbed away. Investors are fretting that the internet big boys, and Facebook in particular, have successfully cloned many of Snapchat’s best features.
“If you want to be a creative company, you’ve got to get comfortable with and enjoy the fact that people are going to copy your product if you make great stuff,” Evan Spiegel, chief executive, said in May after the first quarterly reports as a public company. He seemed less comfortable with Tuesday night’s report, another shocker.
Technology start-ups are forgiven for losing lots of money and struggling with sales in their early years, but Snap’s third-quarter loss of $443 million and revenue of $208 million were well below already reduced expectations. User growth is the key and Snap thoroughly disappointed on this metric, too, reporting daily users of 178 million, behind forecasts of 181 million. User growth was at a “lower rate than we would have liked”, Mr Spiegel said. Quite.
Snapchat is known for its disappearing photo and video messages and virtual selfie masks. As with most fee-free services, it relies on advertisers for income. There’s more and more money in digital advertising, but the market is highly competitive and increasingly dominated by bigger and, frankly, better businesses. Google, the No 1 in digital ads, is about 45 times the size of Snap. Facebook, the No 2, is 33 times larger.
Snap is trying to compete by switching to an automated auction-style ad-buying system, similar to those used by Google and Facebook. This has put pressure on ad fees and therefore average revenue per user, a key metric. In the third quarter it was $1.17, below the consensus estimate of $1.30. Mr Spiegel has emphasised the need for quality of users over quantity — in other words, the need to squeeze more money out of each user — so this was disappointing.
Third-quarter revenue also was hit by Snap’s bad bet on Spectacles, its camera-enabled sunglasses. You might have thought the warning signs were there when Google decided to scrap Google Glass, because the fact is people just don’t want to wear these things. Snap took a $40 million charge on unwanted Spectacles in the third quarter.
The shares plunged by as much as 21 per cent in after-hours trading on Tuesday. The decline was partially reversed when Snap made a suspiciously well-timed disclosure in the early hours of Wednesday. In a regulatory filing it revealed that Tencent, the Chinese tech company and an early investor, had amassed a 12 per cent stake of 146 million class A non-voting shares on the market.
Can Snap change for the better? Mr Spiegel says yes, of course, and his multibillion-dollar fortune depends on it. He said on Tuesday that Snap was redesigning the Snapchat app to make it easier to use, but that this would probably disrupt business in the short term. It also left uncertainty about how existing users would respond.
This sounds like quite a gamble. Then there is the unknown outcome of the ad system redesign and the three consecutive quarters of terrible earnings. Given Snap’s awful share structure, investors had better believe that Mr Spiegel and his team can pull Snap though all this, because nobody else will be able to ring the changes.
ADVICE Sell
WHY The hype has worn off to reveal a start-up that has lost its novelty value amid fierce competition from larger rivals
JD Wetherspoon
Tim Martin, like his pubs, tends to polarise opinion. While his comments on subjects ranging from Brexit to taxes to his pub industry rivals can get up a lot of people’s noses, others regard him as the best operator in the sector, with an intuitive ability to give his customers what they want at a price they can afford.
Marina O’Loughlin, the new Sunday Times restaurant critic, may have found the recently launched Wetherspoon pub in Ramsgate to be cheap and nasty on a visit last month, but her comments caused something of a social media storm, prompting some readers to accuse her of being “a middle-class snob” and urging her to get “back to your ivory tower”.
Perhaps the neatest riposte to her critique is the like-for-like sales growth of 6.1 per cent reported yesterday for the first quarter, which equates to a lot of customers across 893 pubs. Although the company has said previously that it needs growth of 3 per cent to 4 per cent to cover cost increases, it said that its margin expectations were unchanged.
Mr Martin pointed out it was “only one quarter”, predicting that like-for-like sales were likely to moderate over the year while costs would continue to rise.
Nigel Parson, an analyst at Canaccord Genuity, estimated that if the operating margin was to stay at the 8.6 per cent reported in the first quarter, it could add £20 million to operating profits, though he expects it to fall back to 7.4 per cent, reflecting extra cost challenges of £34 million from wages, excise duty, business rates, the sugar tax, energy taxes and the apprenticeship levy.
Given its cheap prices, Wetherspoon is well placed to benefit from any trading down if consumers start to feel the pinch more, but its thin margins leave little room for manoeuvre if revenues start to slow.
Unusually, the group’s total sales in the quarter were below its like-for-like growth, at 4.3 per cent, on the back of the sale or closure of about 80 underperforming pubs over the past two years. That differential should reverse this year. Wetherspoon opened two pubs in the quarter, sold six and plans to open ten to fifteen new pubs this year.
ADVICE Avoid
WHY Shares are up 45 per cent over the year, leaving little room for error if sales slow
