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NEW YORK (Reuters Breakingviews) - Snap investors may be feeling nauseous. The parent of the disappearing-message app reported a slowdown in user growth and a $2.2 billion quarterly loss. Meanwhile, rivals are co-opting features. These are worrisome trends since its lofty $27 billion value hinges on attracting more people.
The company known for its rainbow-vomit photo filters was treated to a more than 25 percent market drop during after-hours trading on Wednesday, sending shares close to its $17 offer price before it went public on March 2.
On just about every metric, Snap disappointed. Revenue rose almost 300 percent to nearly $150 million but missed analysts’ consensus. It torched more cash. Even excluding the whopping $2 billion in stock-based compensation, adjusted EBITDA still notched up a loss of $188 million.
Perhaps most concerning for the five-year-old company is the snail-like pace of daily active user growth. Year-over-year, it rose 36 percent to 166 million (see graphic reut.rs/2r1sgUN). That compares to a 48 percent year-over-year uptick in the fourth quarter.
Co-founder and CEO Evan Spiegel chalks up the tepid growth to exclusivity. It's true that part of its appeal to a young base – more than 80 percent of social-network users in the United States between 12 and 17 use the app, according to eMarketer – is the way it allows close management of contacts. But slow growth also implies Snap’s valuation at 27 times revenue - at least before Wednesday afternoon - is unjustified. Facebook, for example, is trading at around 11 times estimated sales for this year.
In the meantime, Facebook is treating Snapchat like its own R&D lab. Mark Zuckerberg’s social network has copied signature functions like disappearing videos and photos without even bothering to change the name. Instagram's “stories” feature has already amassed 200 million daily active users since it rolled out in August.
Twitter too was once full of promise. Now it’s hamstrung by slowing adoption and declining revenue. Snap’s first set of results looks more like an egg hatched out of Twitter’s nest.