Despite management efforts to instill confidence among Wall Street investors, Snap Inc.’s (NYSE:SNA) shares plummeted 20% to $18.05 during last Wednesday’s after-hours trading, following the release of disappointing first quarter results.
Snap announced revenue of $150 million, up 286% from the same period last year, as well as a net loss of $2.2 billion (or $2.31 per share), and an adjusted EBITDA of -$188 million. The company lost more than $2 billion dollars largely due to staff and executive compensation. CEO Evan Spiegel alone took home a cool $750 million bonus for his work taking the company public.
Back on March 2nd, when Snap Inc. went public, the fresh issue resulted in more than 200 million trades on the first day, with the stock appreciating 44% to $24.48 dollars at the market close. With a market capitalization of $33 billion dollars, the IPO was the largest since Alibaba went public in 2014.
Yet a precipitous drop in share price following first quarter earnings is not unusual. Following the release of their first quarterly reports, Twitter’s shares plummeted 24.2%, and Facebook dipped 11.7%.
While Twitter has languished in its attempts to generate growth, Facebook’s lucrative advertising business and two billion strong global user base has sent its stock price soaring. Moreover, Facebook also awarded similar staff and executive compensation following its IPO, however in the same period it generated $1.2 billion in revenue, compared with Snap’s meagre $150 million in the first quarter.
The stock also tumbled as investors reacted to Snap’s disappointing user growth.
Snap reported that daily active users (DAUS) rose 36% from the same period last year, reaching a record 166 million who send three billion “snaps” a day, but the pace of Snap’s user growth is decelerating. On the investor conference call, Spiegel also disclosed that average users spend 30 minutes per day on the app.
“87% of our U.S. daily active users between the ages of 18 and 34 cannot be reached by any top 15 TV network,” Spiegel reassured investors. “Our platform allows us to engage an audience that research shows is difficult to reach.” Yet there is little evidence Snap is effectively capitalizing on this unique bracket, losing 14% in revenue per user this quarter.
The results come amidst fears that Instagram’s new “stories” feature, a facsimile of the ephemeral snap, poses an existential threat. Owned by Facebook, Instagram alone has over 700 million monthly active users.
“When Google came along, everyone really felt like they needed a search strategy,” Spiegel told one concerned analyst. “When Facebook came along, everyone felt they needed a social strategy. And now I think with Snap, with our company, we believe that everyone is going to develop a camera strategy,” he added.
Back in 2013, Facebook CEO Mark Zuckerberg offered to acquire Snap Inc. for $3 billion dollars. It was a peace offering, and Snap’s cofounders declined. And since then, Facebook has nimbly copied Snap’s key innovations, such as lenses, while popularizing them across its own integrated platforms.
While Snap’s management have hedged their bets on virtual reality, history shows us it is only a matter of time before Facebook subsumes whatever innovation the company comes out with next.
Regrettably, Snap has fallen victim to the Thucydides Trap.
In his account of the Peloponnesian War, Thucydides wrote that “what made war inevitable was the growth of Athenian power, and the fear which this caused Sparta.” The so-called Thucydides trap, a self-fulfilling prophecy, was then coined by Harvard historian Graham T. Allison in Destined for War, an analysis of Sino-American relations.
The metaphor applies equally to Snap’s predicament. At its score, the Thucydides Trap describes a situation where a rising power, like Snap Inc., seeks to displace an established hegemony, like Facebook, at the former’s peril. Inevitably, falling for the trap procures conflict like the war between Athens and Sparta, resulting in a devastating loss for the upstart.
While Snap’s management declined Zuckerberg’s peace offering, there are growth prospects further afield. By copying Facebook’s acquisitive strategy, Snap can stay relevant and grow its user base. Aggressively integrating new digital products and services into its suite of offerings, Snap could profit from a diversified, multi-platform ecosystem that generates synergistic user growth and ad revenues.
The alternative, focusing on one platform and user experience, risks a Twitter-like fate.
Snap’s newly-minted shareholders have little scope for influencing the company’s strategic direction, as the capital structure gives voting rights exclusively to co-founders Evan Spiegel and Bobby Murphy.
Aside from Thucydides’ metaphor, investors should heed one further lesson: beware the peril of vote-less shares.
Unlike Ancient Greece, the corporate world does not aspire to democracy.