Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Public company investing is a stupid, rigged game. But Snapchat should wise up and play along.

On Thursday, the company turned in its second earnings report card since its much hyped IPO. It did not go well. Revenue and the number of new users rose less than expected. A measure of revenue that Snapchat generates from each user was flat compared with the figure in the fourth quarter of 2016. Parent company Snap Inc. should be doing better by now in generating sales.  

Combined with the unpleasant surprise Snapchat also dumped on investors three months ago, the second-quarter figures are sure to make investors who had already turned against Snapchat sour even more. 

Pay No Attention
Snapchat doesn't want investors to fixate on the number of new people using the app each day. Maybe that's because this growth rate has slowed sharply.
Source: Snapchat
Note: Figures reflect Snapchat's calculation of the daily average across each quarter reported.

The only reason Snap was able to go public in March with relatively little revenue, a scant track record and a crazy rate of cash burn was that the company has been clever about repeatedly coming up with fresh ideas to keep its mostly young fans returning to the app. (Who would have thought an animated dancing hot dog could be a fun summer entertainment?) The company's creativity and ability to win over the fickle youth made investors willing to overlook its flaws.

But a company built on investor faith is a fragile thing. And that wobbly foundation is eroding. Shares fell about 17 percent in after-hours trading on Thursday. The company's shares look as if they will open trading on Friday 29 percent below their IPO price. Not good. 

The best thing Snapchat can do now is to do what it never wanted to do: Play the Wall Street expectations game.

CEO Evan Spiegel has said he doesn't want to employ all the sneaky tricks that other internet companies use to look as if they have more fans than they really do. Three months ago, he dismissed these "growth hacking" tactics -- clearly a shot at Facebook-owned Instagram -- like pushing smartphone notifications so people are compelled to use an app, even for just a few minutes. Spiegel talked scornfully about growth hacking like he was using a handkerchief to pick up a filthy dead bird.

Not Good Enough
Snapchat is squeezing more revenue from each of its users, but the growth has been disappointing to investors
Source: Bloomberg

He also hasn't appeared overly concerned when Wall Street analysts question why the company's revenue growth is starting to slow even though it’s still relatively small. Revenue in the second quarter more than doubled from a year ago to $182 million, but that figure was only about 21 percent higher than the previous quarter. Given Snapchat's size, investors are expecting it to grow much more quickly. It won't be easy for Snapchat to top $1 billion in revenue this year, as investors have expected. 

I understand how Spiegel feels dealing with the investment world. He has a plan, even if he won't discuss it in much detail. And it's icky to kowtow to those terrible people to whom he sold more than $3 billion worth of stock in the IPO. And now they are annoyed when the company keeps missing some arbitrary growth numbers. But Snapchat needs to get it together and play the game.

Snapchat would have some breathing room if it held its nose for a few months, used some of those internet tricks and found every user and dollar of ad revenue it could. It would be pointless, maybe. But sometimes public companies have to pick up dead birds. And putting up massaged numbers is a better use of executives' time and energy than plotting how to get Facebook in trouble with antitrust regulators or keeping Spiegel in a security cocoon

Soured sentiment about Snapchat matters to employees, business partners and, most important, advertisers. The person manning the Nike advertising account doesn't want his boss to question why he's spending so much money pitching shoes on a digital hangout that she heard was losing its cool. Underlings can't simply repeat that Evan Spiegel has a long-term strategy and it will all work out just fine.

Say 'Boo'
Snapchat shares are trading below the $17 IPO price.
Source: Bloomberg

Yes, Snapchat is far from the only young company to have sentiment turn against it. As has been said repeatedly here and elsewhere, Facebook was a disaster for its first 18 months as a public company. 

One big difference is the newly public Facebook didn't have to be constantly compared with Facebook. But now Snapchat is competing for ad dollars, users and attention with today's muscular, highly profitable and cutthroat Facebook, which seems intent on smothering Snapchat and any other young challengers. It is brutal. It is unfair that Wall Street cheered on an imperfect, richly valued young company and then turned its back. That stinks. Too bad. Deal with it. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net