Snap stock popped after it reported earnings, but soon crackled as the gains disappeared. The worst could still be ahead.
Shares of Snap initially jumped 15% on Tuesday following its earnings release, as investors cheered stronger-than-expected revenue and earnings. Then they reconsidered. The problem was its user base.
The company reported 495 million daily active users in the second quarter, representing annual growth of 5%, a decent number. But North American daily users fell 7% in that time, while European users were down 2%. All the growth is coming from the rest of the world, but those users aren't very valuable, with average revenue per user (ARPU) of just $1, versus $10.26 in North America. Granted, North American ARPU is up by nearly two bucks in the past year, which drove the Q2 revenue beat. But user declines in the core market isn't exactly a recipe for social-media company success.
The user numbers highlight the problems facing Snap and other social-media names. There have been several lawsuits against Snap, TikTok, and Meta Platforms over their psychic impact on children, which Snap acknowledges could "materially impact our business and financial results."
Looking to a post-phone future, Snap is betting that Americans will want its software on their noses all day. That's the bold idea behind Snap Specs, the alternative-reality glasses it unveiled in June and will officially launch in September.
Specs sit in an interesting niche between the help-a-squid-is-eating-my-face bulk of the Apple Vision Pro and the nearly normal-looking but far-less-capable Meta Ray-Bans. Unfortunately, this means the Specs are meant to be worn like glasses but are notably bigger; when CEO Evan Spiegel wore them on CNBC, his ears cauliflowered beneath their weight, and his pupils were barely visible. Beyond the fashion qualms, Snap's ability to compete with the likes of Apple as a hardware and app company is doubtful.
Spiegel sidestepped a question about preorders on the earnings call, saying that the Specs announcement "broke through" and created "a huge amount of interest." Never mind that this interest was largely focused on its clunky design and eye-watering price. He went on to say that Specs are "obviously a high-consideration purchase" at $2,195, so "for the broader public and consumers, it's going to be really important for folks to go hands-on." That sounds like a tacit acknowledgment that the presale isn't going well.
"The level of investment and expected return on Specs is still a question mark," BNP Paribas analyst Nick Jones politely points out.
The stock is down 10% from Wednesday's close, but the long-struggling stock is still up 11% in August. To buy the stock here, you'd have to be living in Snap's augmented reality.
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