Snap (SNAP)’s recent expansion efforts into areas like gaming, original content and augmented reality are the right moves, say analysts, but all that spending has delayed when the company will become profitable.
The Venice, California-based social network reported fiscal first-quarter 2019 earnings on Tuesday afternoon that beat Wall Street expectations, narrowed losses and added 4 million daily active users, bringing Snap’s total user base to 190 million daily active users. But Snap’s increased spending in areas including Snap Games, 10 new original shows and more AR features, means the company likely won’t become profitable as soon as some analysts originally predicted.
Wedbush analyst Michael Pachter and Nomura Instinet analyst Mark Kelley now estimate Snap won’t become profitable until 2021 at the earliest — at least a year later than both analysts originally projected.
“They have much greater reach among younger demographics, as they pointed out during earnings, and they have to serve and entertain these people,” Pachter tells Yahoo Finance. “I’m not being critical of them, but investors are going to have to be more patient.”
Likewise, Kelley, who raised his price target on Wednesday for Snap from $9 to $10 per share, while maintaining a Neutral rating, wrote the company’s more recent launches — a redesigned Android app, the launch of Snap Games, and the ads-focused Snap Audience Network — are noteworthy.
"The last several months have brought a number of encouraging data points, but the company is still on a long track to profitability,” Kelley wrote in his note on Wednesday.
In April alone, Snap rolled out its long-awaited Android app update, which improved the camera feature and addressed stability issues. According to Snap, there was a 6% increase in the number of people sending Snaps within the first week of the Android app update’s release.
In addition, the company rolled out Snap Games, a platform for casual and original games with six-second advertisements, 10 new original shows exclusive to Snapchat, and more augmented reality features. Snap also launched the Snap Audience Network, an advertising platform that essentially sells ads that appear in other mobile apps besides Snapchat. (Snap takes an unspecified cut of the ad revenues in exchange for selling ads on behalf of the app developer.)
Snap’s decision to roll out a gaming platform is the right one, analysts like Pachter and eMarketer analyst Debra Aho Williamson agree. One of Snap’s greatest assets is its younger core audience, which Snap CEO Evan Spiegel reiterated on the earnings call on Tuesday. According to Snap, 75% of 13- to 34-year-olds in the U.S. are on Snapchat — more than Instagram. Simple as it sounds, keeping that younger audience engaged and coming back is paramount to building Snap’s user base further, which was a challenge for the company in 2017 and 2018.
“Snap’s decision to add gaming is a smart move, since many young people are spending more and more time playing games and watching others play games,” Williamson tells Yahoo Finance. “In order to keep its strong hold on the youth demographic, a move into gaming was a necessity. Now it will be all about execution and whether Snap can come up with games that keep its user base engaged.”
And if those efforts delay Snap’s profitability? Then, perhaps, so be it.
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