Snap beat expectations and sent its stock price skyrocketing—still minus profit

Chatting Snap.
Chatting Snap.
Image: Reuters/Lucas Jackson
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Finally, a little bit of good news for Snap.

The parent company for the ephemeral-messaging app Snapchat announced its fourth-quarter earnings today (Feb. 6). Analysts had been expecting a loss of around $409 million, on about $255 million in revenue. Snap in fact reported a loss of about $350 million for the quarter, on $286 million in revenue.

It’s been a rough start to life as a public company for Snap. It debuted on the New York Stock Exchange in March 2017, and a string of poor results, and constant competition from Facebook (which has copied just about every good idea that Snapchat has ever had), has seen the company not trade above its IPO price since July.

The positive news about Snap’s revenue was well received by Wall Street, however. Shares skyrocketed about 26% in after-hours trading, to nearly $18 at the time of publishing. (The last time it closed a trading day over $18 was in June.)

Snap announced in November that it planned to redesign its app, separating out all the content its users send and receive from friends onto one side of the app, and content from publishers and creators onto the other. It also aimed to entice more creators, like those on YouTube (and previously on Vine), to embrace the app as a platform.

On the earnings call, CEO and founder Evan Spiegel said that about 40 million users have received the redesign so far. Initial responses from the users with the redesign have been far from positive. But Spiegel also added on the earnings call that “content consumption and time spent in the redesigned application are disproportionately higher for users over the age of 35,” which could bode well for growth in older demographics. But if it comes at the expense of its existing younger users, it probably won’t be particularly helpful overall.

Snap is still struggling massively to bring its revenue up to par with expenses. This quarter, it cost $646 million to generate $286 million in revenue. Expenses were up 93% over the same period last year. One of its biggest expenses is the cost of supporting streaming photos and videos—the bulk of the functionality of Snapchat—which Snap said in its earnings presentation accounted for $131 million in costs in this quarter alone.

The company has hinted at new revenue streams in recent months, including automating its advertising portal, and showing snaps on the wider web. It also wants to open up its platform to more creator content as part of its redesign (which in turn could bring in more eyeballs for its advertising), and it just launched a merchandise store that some suspect could be licensed to customers to sell products directly through Snapchat. We’ll have to wait to see if that will be enough to help turn the tide on expenses.

One of the simplest ways for Snap to get more revenue (albeit, with more costs, too) is to drum up new users. Snapchat’s user growth, falling in recent quarters, showed a slight uptick this quarter. The app now has 187 million daily active users, up from the 178 million it reported in the third quarter—an 18% jump over the same period last year.

Snapchat’s average revenue per user has crept up again, to $1.53 this quarter—a jump of about 46% over the same quarter last year. The overwhelming majority of Snap’s revenue comes from Snapchat users in North America. It still has tons of room to grow revenue in other regions, which can be seen as positive by investors.

Given the massive losses the company is still generating each quarter, and the fact that it’s not really lowering quarterly expenses, will Snap realistically be able to turn a profit, or just break even any time soon? Will it still be able to continue to attract new advertisers, and new users, when 2 billion people use Facebook each month, and nearly double the number of Snapchat’s users use Instagram’s knock-off Stories feature? Anything Snapchat does, Facebook copies nearly instantly. Anything else Snap thinks to do—like sell plush toys or video glasses—seems to be like rearranging deck chairs on the Titanic.

How long will Snapchat be able to hold on as a public company in the face of Facebook? Who can say? And how important is making money anyway? Twitter went public five years ago and still has never turned a profit.