Snap Enters Its Rorschach Phase: You See What You Want

(Bloomberg Opinion) -- If you're inclined to be optimistic about Snap Inc., the company's earnings results on Tuesday gave you hope. The same was true if you're inclined to be pessimistic. 

The good news was Snap's user numbers didn't shrink, revenue growth was better than expected and spending was restrained by Snap's modest standards. The bad news: Those three factors probably won't last. 

Snapchat's parent company said on Tuesday that its revenue rose 39 percent in the fourth quarter — higher than the growth rate in the December quarter — and that the number of people who use the Snapchat app at least once a day increased by 4 million from the prior quarter to 190 million. Sales growth in the region that includes the U.S. and Canada was also higher than the pace in the fourth quarter. 

It's not quite hypergrowth for revenue and particularly not for the people using Snapchat's app. The results were good enough to warrant guarded optimism for Snap, which remains clever about rolling out features that its users love — with some exceptions — but has been in shambles for most of its two years as a public company. 

Ah, but back to goodies for the pessimists. Snap all but said the number of its daily users wasn't likely to grow much if at all in the second quarter. The midpoint of the company's second-quarter revenue forecast implies a slower growth rate than the one in the first quarter. And the company cautioned that its spending was going to increase after a bout of restraint under its former chief financial officer, who left in January after eight months on the job.

Snap said its outsourced computing costs, which make up about one-fifth of all expenses, was likely to go up because people are using Snap's app more. Good news, but also bad news, particularly if that additional usage comes in countries where Snap's advertising revenue is scant. Snap also is planning “additional investments” in a whole bunch of areas.

On paper, that's fine. Snap is supposed to be a high-growth company, and it has several new projects including a new feature for people to play video games as they chat with their friends in Snapchat. Those require investment. But Snap's management team — still without a permanent replacement CFO — hasn't proved that it can spend money wisely. 

You could feel the doubts creep in during after-market trading. Snap shares initially shot up on the earnings results and then started to fade a bit, showing a 6 percent gain an hour after the close of regular trading. Snap's shares have already soared this year on optimism that the worst is behind it, and that has made the stock rather pricey. (Snap's stock is about 29 percent below its IPO price from March 2017.) 

It remains far too soon to say that Snap's recovery has taken hold. Signs of optimism are there, sure, in better revenue growth, user stability and delivery on a long-promised new version of Snapchat's Android app. But there's still plenty to worry about for a company that hasn't been good at turning its genuinely novel products into a genuinely good business. 

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

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

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

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