Snap Shares Struggle to Grow as Company Invests in Technology

by Warren Seah

Snap shares are experiencing a sharp decline in trading as the company delivered a highly disappointing forecast for the September quarter. This highlights the ongoing challenges the company faces in growing its business while investing in machine learning, artificial intelligence (AI), and other innovative technologies.

Q2 2021 Financial Results

During the June quarter, Snap reported a revenue of $1.068 billion, representing a 4% decline from the previous year. However, this figure aligns with the Street consensus forecast of $1.05 billion. On an adjusted basis, Snap (ticker: SNAP) recorded a loss of 2 cents per share, surpassing the Street’s expectation of a 4 cents per share loss. On a GAAP basis, Snap posted a loss of 24 cents per share in the quarter.

Snap’s daily active user base has grown to reach 397 million users, reflecting a 14% increase and surpassing the Street’s expectations by a few million users.

Disappointing Outlook for Q3

Despite these positive user growth numbers, Snap’s outlook for the third quarter falls significantly short of expectations. In premarket trading, Snap’s stock has plummeted by 17% to $10.36 due to this forecast.

For Q3, Snap anticipates a revenue range of $1.07 billion to $1.13 billion, which is either flat or represents a decline of up to 5% compared to the previous year’s figures. The midpoint of this range slightly misses the Street consensus forecast of $1.13 billion.

Furthermore, Snap expects an adjusted EBITDA loss (earnings before interest, taxes, depreciation, and amortization) between $50 million and $100 million for the quarter. This is an expansion from the $38 million loss reported in the June quarter and greatly exceeds the Street’s expectation of only a $2.4 million loss.

Increasing Costs Amid Search for Growth

As Snap continues to search for new avenues of growth, the costs associated with these efforts are rising. This indicates the company’s commitment to exploring emerging technologies and expanding its capabilities.

As a result, Snap is facing significant challenges in achieving its growth targets, leading to the current decline in share prices.

The market will closely monitor Snap’s progress in implementing its technology-driven strategies and its ability to turn this investment into sustainable growth in the upcoming quarters.

Snap Inc. Infrastructure Costs Rise, Revenue Growth Challenged

Snap Inc. has revealed that it expects infrastructure costs per daily active user to be between 79 and 84 cents a share in the current quarter. This increase reflects the company’s ongoing investments in machine learning, AI, and other infrastructure. In comparison, infrastructure costs per daily active user were 70 cents in Q2, up from 58 cents the previous year, and 59 cents in Q1.

To counter the challenges faced by Snap Inc., the company is focusing on investing in products that will sustain community growth and deepen user engagement. Additionally, it aims to invest in its direct-response ad business while seeking new sources of revenue.

Operating expenses have decreased by 8% from last year, and headcount has dropped by 20% since last year’s peak in the third quarter.

The June quarter posed difficulties for Snap Inc.’s revenue growth, partly due to changes made in its advertising platform. Brand advertising saw an 8% decline while direct-response ads decreased by 7%. The quarter also saw a seven percentage point decrease in adjusted gross margin, down to 54%.

Snap Inc. remains committed to adapting and finding new avenues for growth despite these challenges.

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