After falling nearly 25% in July, shares of social media company Snap Inc (SNAP) are up about 18% over the past month. The stock jumped 8.7% on 31st August as the company announced restructuring plans to deal with its current challenges. Before getting into Snap’s new plans, a little background on its struggles should help understand the Snapchat-parent better.
From a golden era to a dark time
Snap and other social media companies like Meta Platforms (META), Twitter (TWTR) and Pinterest (PINS) are facing major headwinds now after enjoying a golden era of growth during the lockdown. In March 2021, Snap Chief Executive Officer Evan Spiegel said that annual revenue growth of over 50% is possible despite additional user growth. However, a lot has changed since then.
Snap’s revenue and user base growth has been slowing down, with its average revenue per user (ARPU) falling 4% year-on-year in the second quarter of 2022 compared to a 76% growth in the second quarter of 2021. While Snap was able to narrow its net loss from $945 million in 2020 to $488 million in 2021, the net loss widened 78% to $782 million in the first half of 2022. The company, which was valued $130 billion a year ago, is now worth less than $20 billion.
Exhibit 1: Year-on-year growth in Snap’s key metrics
Source: Company Financials, July 2022
What’s ailing Snap?
There are three major reasons behind Snap’s sluggish growth. Firstly, the exponential rise in ByteDance’s TikTok has threatened not just Snap but also Facebook and Instagram owner Meta Platforms. Despite both companies launching similar short-video formats on their platforms, TikTok continues to be a favourite, especially among teens, around the world.
Secondly, Apple’s (AAPL) privacy changes, allowing users to choose if applications like Snapchat and Facebook can track their activity across the device, has hurt ad revenues of these social media companies. Thirdly, rising inflation and other macroeconomic uncertainties have cooled off the entire online ad sector as marketers’ budgets have come under tremendous pressure.
How does Snap plan to deal with current challenges?
While revenue growth slowed to 13% in the second quarter, it has been a modest 8% so far in the third quarter. In the words of CEO Evan Spiegel, Snap must now “face the consequences of our lower revenue growth and adapt to the market environment.” The company aims to save $500 million annually through the following restructuring plans:
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20% headcount reduction
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Discontinue further investment in Pixy flying drone camera
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Wind down standalone apps – social media app Zenly (acquired in 2017) and music creation app Voisey (acquired in 2020)
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Significantly reduce investments in Minis and Games
The focus is back on ad business
The company now wants to redirect focus to its core income stream which is the advertisement business. This means that the company will shut down projects like flying drone selfie cameras and mobile games. The management promoted Senior Vice President of Engineering, Jerry Hunter, to Chief Operating Officer. He will be responsible for closely coordinating between ad sales, product and engineering teams which may potentially help Snap improve ad targeting. Snap also restructured its ad sales division to include three new president roles to oversee Asia-Pacific, Americas, and Europe, Middle East and Africa regions.
Will Snap be able to snap out of this nightmare?
While the restructuring plans make sense from the cash flow and income statement perspective, they also put a stop to its ecosystem expanding projects and hence, the ultimate target of becoming a super app like Tencent’s WeChat in China. This may also take away Snap’s competitive advantage over other social media apps and may further hurt its user growth. In addition to this, given the current macroeconomic environment, the journey ahead for Snap indeed looks like an uphill battle.
