Inc.’s monster second quarter should fuel its newly favored stock. But the problem with popularity in social media is that it can be fleeting—especially when it comes to an app notorious for disappearing content.
On Tuesday, Snap reported second-quarter revenue of $388 million, handily topping Wall Street’s projection of $360 million. Most notably, the Snapchat parent added 13 million daily active users during the quarter, eclipsing the 2 million additions analysts expected. It also was Snap’s best growth rate in three years. The stock, up 169% already this year, jumped another 12% following the results.
But even a such strong report doesn’t settle questions about sustainability. Snap credited more than half of the user additions in the quarter to its new augmented-reality lenses. The company also didn’t detail exactly how its recently redesigned Android app affected growth, though most of its new users came from markets outside North America and Europe, where Android is more prevalent. The new features were likely big draws for both returning and new users alike. But novelty doesn’t last forever, and Snapchat’s young user base is a notoriously fickle crowd.
Snap’s stock has recouped roughly two-thirds of what it lost in 2018 following the epic fail of its initial Android redesign. Further upside looks possible from a valuation perspective, especially if Snap can continue to meaningfully expand its user base rather than simply regain lost users. At about 10 times enterprise value to next year’s sales, Snap’s stock is still trading well below the two-year high of more than 16 times it reached last February.
That peak was achieved during a period of consistent user growth, however, and meaningful user expansion in the longer term may prove challenging. In a conference call Tuesday, Snap’s management projected a return to more modest growth of 2 million to 4 million net new user additions in the third quarter.
In a recent social media survey, RBC found users across all age groups planned to decrease their social-media use rather than increase it over the next 12 months. Less total usage combined with increasing competition from apps such as TikTok, Marco Polo and Instagram’s Stories don’t make a winning equation for Snapchat’s future growth.
Snap’s new users sometimes prove as ephemeral as their photos: Now you see them, now you don’t.
Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8