Snapchat started in the year 2011 by Evan Spiegel and Bobby Murphy, is an application developed for picture messaging. It gained popularity because it added a differentiating feature that would delete the images after its been viewed for a few seconds. It grew exponentially with 1000 plus user base, (with mostly teenagers) within a very short period of time and continues till date.The valuation of Snapchat increased when Lightspeed invested in it in the year 2012. Companies like Facebook were ready to buy Snapchat, as its users especially the teenagers were leaving Facebook. Its tremendous growth and popularity amongst the teenagers is giving tough competition to companies like Facebook and Twitter (Malhotra, 2015).
Successful marketing strategies of Snapchat:
Snapchat is making the best use of the technology and has approximately 100 million daily active users. Until 2015, it was worth around $16 billion. There has been continuous efforts for trying new methods of monetization but, there has still not been any substantial revenue generation. Snapchat has shown tremendous growth and has become very popular amongst the youth generation in the age group of 13-34 years (Gotter, 2017). The continuous increase in the user base and high valuation has made Snapchat a big sensation and on March 2017, it offered its initial public offering (IPO). But, despite of all this, it could not be very successful with its IPO. When in its third quarter, Snapchat could not meet its targeted revenue, the stocks plummeted by 20% which was a great loss for the company. Since then, the company could not trade above the IPO price. Since then, there has been disappointing results from the company (Wade, 2017).
Reasons for the failure of Snapchat:
Thus, we see that Snapchat’s major issues include lack of a revenue generating model, strong competition that could imitate fast and do it in a much better way and also concentration on only the youth. These are some of the problems that could be identified for Snapchat and which needs immediate correction if, the company wants to stay in the market. Looking at the scenario it seems that Snapchat’s decision of not letting Facebook acquire it, was not the right decision for Snapchat.
Though Snapchat had enormous growth as soon as it started, but an overall study helps to understand that it was not a profit-making company. The high valuation of the company was due to the increased user base but, with time, there has been a decline in the company’s user base and also performance. There was lack of diversification in terms of users and market, which did not allow the company to prosper in a very effective way. If the financial data of the company is studied, it is clear that in the last few years it has not been able to become financially sound. The profitability and net operating cash flow of the company has been negative. (Investing.com, 2018)
Profitability as on June 2018 (Investing.com, 2018)
|
Gross Margin |
19.89% |
|
Operating Margin |
-159.46% |
|
Pre-tax Margin |
-156.62% |
|
Net Profit Margin |
-115.15% |
|
Return on Assets |
-33.28% |
|
Return on Equity |
-37.1% |
|
Return on Investment |
-36.13% |
The profitability of Snapchat is negative, which shows that the company’s financial position is not good. The return on assets, equity and investment is also negative thus, impacting the financial strength of the company.
Liquidity Ratio as on June 2018 (Investing.com, 2018)
|
Current Ratio |
6.69 |
|
Quick Ratio |
5.28 |
|
Cash Ratio |
5.62 |
Liquidity ratio is a method of calculating a company’s capability to pay off its current debts without raising external capital. Current Ratio (Current Assets/ Current Liabilities) is positive which means that the company is capable of paying out its current liabilities with its current assets. Quick Ratio (Current Assets- Cash/ Current Liabilities) is also positive which signifies that the company can pay out its current liabilities even if it does not have liquid cash or cash equivalents. Cash Ratio (Cash and Cash Equivalents/ Current Liabilities) is also on the positive side thus, signifying that the company is capable of paying off its current debts with the cash it has in hand.
Capital Structure as on June 2018 (Investing.com, 2018)
|
Total Debt to Total Equity |
0.14 |
|
Total Debt to Total Assets |
0.47 |
The capital structure of the company shows that it uses more of equity capital to finance its assets. It has low leverage ratio and has a conservative capital structure. It also signifies that low leverage ratio means lower growth rates. Thus, Snapchat should decide upon the optimal mix of debt and equity. There is need for the company to find an optimal capital structure.
The overall study of the company’s financial statements helps in analysing that the company’s financial position and capital structure is not strong enough. The company is not generating profits and its dependence is mainly on its investors. There is need for diversification of the user base and market so that it can increase its users. It has to look for profit making features and also, use all the Snapchat features properly. It should attract more advertisements and make sure that it is easy to use the app and also transit the ads to other platforms. The little changes can help in improving the overall performance of the company and also help it survive its competitors. Facebook subsidiary, Instagram imitated the features of Snapchat but is more popular and profitable as it focused on a diversified user base and has provided easy interface which is very comfortable for its users (Hartmans, 2017).
Conclusion and Recommendation
A thorough study about Snapchat makes it clear that it is not able to perform as s expected. There has been a decline in the quarterly reports which has affected the stock price. The investors are obviously not happy with the stock performance and it can have a great negative impact on the company (Tully, 2017). It is also facing fierce competition from Instagram, which is imitating all its features and capturing a large chunk of the market (Nield, 2018).
There are certain recommendations for the company that might help the company to acquire the market again.
These recommendations are provided on the basis of the problems identified. A little change in the strategies and improvement in the product can lead to better performance of the company and increase in the user base.These recommendations will help in facing the tough competition from Instagram, YouTube and others.
A proper revenue generating model has to be prepared to show the investors that it is a profitable company. A company without a stable income generation cannot prosper for long. There is a need to increase and diversify the user base and make advertisement easy for the small and medium- sized business as well. Currently, Snapchat is able to build brand awareness of the companies but, it is not able to make direct sales. The CEO of the company should focus more on data available and less on instincts to make sure that it is adapting to change in the environment.He should focus on continuously increasing the user base as that is the only USP of a technical company. The high valuation that it received in the start was only due to the user base it had and thus, there should be continuous effort on increasing the user base. Diversification of user base is also very necessary to increase the customer base for the companies that are aiming at advertisements through Snapchat. It also needs to communicate with the world about its future planning, so that there is trust factor amongst the users and investors which could help in increasing the share price of the company.
Thus, the best action plan that can be recommended for Snapchat is:
Simpler interface User diversification Market diversification Reasonable and right metrics for advertisements Openness and Willingness to trust data Communicate with the world
It is time for Snapchat to build the trust and confidence amongst the users and the investors that it is a revenue generating company, focussing on all its potential users and re-designing the application keeping in mind the users of all age group. It has to prove that it is not an immature company without any specific direction or goal.
References
Castillo, M. (2017, January 11). Here are challenges Snapchat faces as it gets closer to its IPO. Retrieved from https://www.cnbc.com/2017/01/11/here-are-challenges-snapchat-faces-as-it-gets-closer-to-its-ipo.html
Constine, J. (2017). Snapchat’s epic strategy flip-flop. Retrieved from https://techcrunch.com/2017/11/13/time-to-snap-into-action/
Deagon, B. (2017, November 7). Here Are The 4 Challenges That Snap Is Failing To Overcome. Retrieved from https://www.investors.com/news/technology/here-are-the-4-challenges-that-snap-is-failing-to-overcome/
Gotter, A. (2017, March 29). The Ultimate Guide to Snapchat Marketing. Retrieved from https://adespresso.com/blog/ultimate-guide-marketing-snapchat/
Hartmans, A. (2017, July 22). We compared Snapchat and Instagram to find out which app is better – here’s the winner. Retrieved from https://www.businessinsider.in/We-compared-Snapchat-and-Instagram-to-find-out-which-app-is-better-heres-the-winner/articleshow/59715821.cms
Investing.com. (2018). Snap Inc (SNAP). Retrieved from https://www.investing.com/equities/snap-inc-balance-sheet
Khoury, R. E. (2017, February 3). Snap recognizes it should focus on Snapchat Android app development to keep its users and growth. Retrieved from https://www.androidpolice.com/2017/02/03/snapchat-recognizes-focus-android-app-development-keep-users-growth/
Malhotra, S. (2015). Snapchat: Fad Or Future? Amity Research Centers.
Nield, D. (2018, March 22). 5 Reasons to Ditch Snapchat for Instagram, If You Haven’t Already. Retrieved from https://gizmodo.com/5-reasons-to-ditch-snapchat-for-instagram-if-you-haven-1823769483
Oreskovic, A. (2017, March 8). Snapchat is facing 2 big growth barriers and the stock is sinking because of it. Retrieved from https://www.businessinsider.in/Snapchat-is-facing-2-big-growth-barriers-and-the-stock-is-sinking-because-of-it/articleshow/57527348.cms
Singh, A. R. (2017, December 14). The Problem With Snapchat. Retrieved from https://thinkgrowth.org/the-problem-with-snapchat-b24aefc542b4
Taylor, J. (2018, February 28). What To Expect When You Start Advertising On Snapchat. Retrieved from https://www.forbes.com/sites/forbescommunicationscouncil/2018/02/28/what-to-expect-when-you-start-advertising-on-snapchat/#312b83b965e3
Tully, S. (2017, March 21). How Snapchat’s IPO Became One of Wall Street’s Biggest Flops. Retrieved from https://fortune.com/2017/03/21/snapchat-snap-ipo-wall-street/
WADE, M. (2017, May 11). This Is Snapchat’s Biggest Problem. Retrieved from https://fortune.com/2017/05/11/snapchat-earnings-biggest-problem-instagram-facebook/
Wagner, K. (2017, November 7). Snap CEO Evan Spiegel is redesigning Snapchat because it’s too hard to use. Retrieved from https://www.recode.net/2017/11/7/16620812/snapchat-evan-spiegel-redesign-users-q3-earnings
Weiss, G. (2018, June 21). Snapchat To Place Renewed Emphasis On Creator Community, Unveils Second Series With Patrick Starrr. Retrieved from https://www.tubefilter.com/2018/06/21/snapchat-renewed-emphasis-creators-patrick-starrr/
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