Snapchat's growth stalls in Facebook's shadow; stock plunges

Facebook's shadow continues to hang over Snapchat as its parent company reported disappointing numbers.

Snap Inc., best known for disappearing messages even though it has evolved to become much more, had a massive loss and saw user growth continue to slow down in the first three months of the year. Its revenue was below Wall Street's expectations in its first quarterly earnings since its initial public offering of stock.

Snapchat has tried to become more like its bigger rival — at least when it comes to success — by courting new users and with them, advertisers.

Instead, Snapchat reported 166 million daily active users in the latest quarter, an increase of just 36 percent from a year earlier. In its first post-IPO report in 2012, Facebook also disappointed investors when it grew its daily user base by only 32 percent. But by then, Facebook had 552 million, more than three times Snapchat's.

WHERE THE MONEY WENT

About $2 billion of Snap's $2.2 billion net loss in the January-March period was for IPO-related stock compensation costs. Facebook had similar costs, about $1.3 billion.

But Facebook's revenue was $1.18 billion in its first earnings report as a public company. Although Snap's revenue nearly quadrupled to nearly $150 million in the latest quarter, it's less than the $158 million that analysts polled by FactSet were expecting.

Put another way, revenue was hardly enough to overcome the huge IPO expenses.

Snap's stock $5.50, or 24 percent, to $17.48 in after-hours trading.

Wednesday's results from Snap come just a week after Facebook reported solid first-quarter results, with double-digit revenue growth — as it has consistently since its IPO.

COPYCATS

Facebook has been bent on copying Snapchat ever since the social media giant tried unsuccessfully in 2013 to buy it.

Growth in Snapchat's user base began to slow down last year after Facebook's Instagram copied Snapchat's "stories" feature, which lets users post short video clips that disappear after 24 hours. Not to miss out on the trend, Facebook also launched disappearing stories this year.

And let's not forget about WhatsApp, the Facebook-owned messaging service that came out with "status," which lets people post photos and videos that disappear after 24 hours. See a trend here?

ALL ABOUT THE MESSAGING

Matt Britton, CEO of social media marketing company Crowdtap and an expert on millennials, believes Snapchat has "gotten ahead of itself" in pushing out new features, when what it does best — and what it's most used for — is one-on-one messaging.

"If you ask any teen how they use Snapchat, (most) say they use it to text people," Britton said. "I think texting, one-on-one, they have their audience hooked. That's going to continue."

He said he's seen a lot of teens replace the telephone icon at the bottom of their phones' most-used apps with the Snapchat app. Why call when you can snap, after all?

NOT A SOCIAL NETWORK

Snapchat's Stanford-dropout CEO, Evan Spiegel, has long insisted that his company is not a social network but a "camera company." Unlike Facebook, Twitter or Instagram, Snapchat isn't connecting networks of people. You could use it with just one other person, if you wanted. This sets it apart from its rivals, but could also make it more difficult for businesses to target ads to its users based on their personal connections.

Britton sees challenges for Snapchat's non-messaging features, such as stories and a "discover" option that lets users keep up with news, sports or celebrities. These features aren't what many users go to Snapchat for.

Snapchat, like Facebook, is also experimenting with augmented reality, a blending of the virtual and physical worlds, but it's still hard to tell how that will make money or have broad appeal.

GROWING UP

As popular as Snapchat is with young people, they won't be young forever. If the company wants to grow its user base, it will have to broaden its reach to include older people.

"Right now they clearly have a loyal user base in the younger population, but the over 30 year old demographic is one of the most attractive segments for advertisers because of their spending power," Eric Kim, managing partner at venture capital firm Goodwater Capital, wrote in a report.

Of course, the downside of that is that teens don't necessarily want to be using the same messaging and socializing tools that their parents and grandparents are using. So, the choice is to keep up with the younger generations and "their evolving behaviors and attitudes," or grow up with its original audience as it ages, said Jessica Liu, an analyst at Forrester Research.

"If they attempt to tackle both, Snapchat will discover that meeting the needs of a 15 year old vs. a 30 year old will be very different," Liu said in an email.

TO COPY OR BUY?

As Facebook keeps copying Snapchat, what can Snapchat do to stay ahead?

"They need to acquire the next Snapchat — companies that are doing one thing right," Britton said.

This could be an app such as Houseparty, a group video chat app that's popular with teens, or Musical.ly, a video social network that lets people create and share short music videos.

"Whatever the new thing is, they should acquire that," he said.

And the cycle continues, as Facebook won't be far behind in copying that, too.