Snap (NYSE: SNAP) believes its recent app redesign is part of its long-term success. But users seem to disagree.
The redesign that separates publisher content from friend content has been criticized by users for being confusing and frustrating. The redesign was meant to make the app less complicated, as Snap had been receiving complaints from people saying the design wasn't intuitive.
To understand why Snap felt the need to redesign its app, which is especially popular with younger users, it's important to go back to its IPO last March, when shares were arguably priced for more growth and profits than Snap could deliver.
1. Snap posts disappointing user and revenue growth
Snap's first year as a public company started with its IPO on March 2, 2017. Shares closed up 44%, to $24.48, on their first day of trading. But it was mostly downhill from there.
User growth failed to live up to Wall Street's expectations, partly because people started using the Instagram Stories feature that was copied from the Snapchat Stories feature. Instagram, owned by Facebook, soon had nearly 100 million more daily active users (DAUs) for its Stories feature than Snapchat.
In its first quarter as a public company, Snap reported 166 million DAUs, missing the 167.3 million expected by analysts. In the second quarter, Snap missed on DAUs again when it hit 173 million DAUs vs. the expected 175.2 million. The third quarter was the same story, at 178 million DAUs vs. 181.8 million expected.
It was a similar story with revenue. Snap missed on revenue for the first three quarters of 2017, and by the end of the third quarter, investors were growing restless. Wall Street was ready to turn its head away from a company that some once thought might be the next Facebook.
2. Snap gets downgraded on Wall Street
Wall Street was doubtful of Snap from the beginning because many thought it lacked a clear path to profitability. Within 20 days of its IPO last March, Snap had six sell ratings, three hold ratings, and just one buy rating from James Cakmak of investment firm Monness, Crespi, Hardt.
As the year progressed, Wall Street grew increasingly frustrated with Snap's lack of user and revenue growth. The company received a number of harsh downgrades throughout the year as confidence dwindled. Cowen analyst John Blackledge downgraded Snap in July for reasons including the slow adoption of the company's new ad products, as well as the increasing competition from Instagram.
Following the company's third-quarter results in November, Morgan Stanley analyst Brian Nowak downgraded the stock due to "growing challenges facing Snap's monetization potential and user opportunity."
Also in November, UBS analyst Eric Sheridan downgraded Snap. He said that he could no longer attribute the disappointing financial results to "growing pains" since the company was now past its third quarter. He also thought Snap would continue to struggle over the next year due to the upcoming app redesign, as well as increasing competition.
3. Snap announces redesign
Along with its third-quarter report in November, Snap announced an app redesign that would separate professional content from friend content. At the time, CEO Spiegel said that the company had heard a number of complaints over the years that its app was complicated to use. He hoped the redesign would fix those issues in the long term, but also warned investors that design changes always take time for people to get used to.
4. Snap announces Q4 surprise
Snap finally managed to pleasantly surprise investors during the fourth quarter when it hit 187 million DAUs, topping the 184.2 million expected, according to the report released in early February. Snap also beat revenue expectations for the first time as a public company when it reported revenue of $285.7 million, which was significantly more than the $252.9 million that analysts were expecting.
Snap attributed the turnaround in the fourth quarter to a number of changes, such as the improved design of the Android Snapchat app. But more importantly, Snap was seeing the benefits of its auction-based advertising system called "programmatic" that gives ad spots to the highest bidder. On the earnings call, Spiegel said ad impressions were up over four times year over year and that ad revenue grew 38% from the third quarter.
5. Snap gives wide release of redesign
Snap began to rollout the redesigned app at the end of 2017 to little fanfare. However, when it had its wide release on Feb. 6, the company was suddenly the target of heated criticism from its users, who were used to the old design.
6. Snap users largely hate the redesign
Even though Spiegel said users would need time to adapt to the change in design, it's hard to imagine that he was expecting as much backlash as he got. By the end of February, over 1.2 million people had signed a petition on change.org asking Snap to remove the update that they said made features more difficult to use.
On Feb. 20, the Snap team posted a response on change.org that said the team appreciated the feedback, but the redesign was here to stay. The team elaborated by saying that the goal of the redesign was to make it easier to connect with your real friends.
Even reality TV celebrity Kylie Jenner, a big Snapchat user, voiced her negative opinion about the redesign. She posted a tweet on Feb. 21 that said the redesign makes her not want to use the app anymore.
7. Snap gets downgrades based on redesign
While the redesign was supposed to be part of Snap's turnaround efforts, the company ended up receiving a number of downgrades because of it. In January, Jefferies analyst Brent Thill downgraded Snap because the redesign, which had yet to be widely released at that point, "could lead to some turbulence in usage and adoption when rolled out."
Raymond James analyst Aaron Kessler also downgraded Snap in January because he felt users would be less likely to look at content from publishers after the redesign. Publisher content is important for Snap's monetization strategy because that's where it gets money from ads. The content sent between friends is much harder for Snap to monetize.
Citi's Mary May downgraded Snap on Feb. 22 due to the extreme negative feedback about the update after the wide release. "While the recent redesign of its flagship app could produce positive long-term benefits, the significant jump in negative app reviews since the redesign was pushed out a few weeks could result in a decline in users and user engagement, which could negatively impact financial results," May wrote in a letter to investors.
8. Snap tells users to deal with it
Snap has held its ground on the redesign. Spiegel has maintained that the company felt it was on the right track with the redesign, according to comments made at the Goldman Sachs Internet and Technology Conference on Feb. 15. "We're excited about what we're seeing so far," Spiegel said at the event.
He said the complaints they're receiving are actually validating the changes they made. For example, one issue for users is that celebrities like Kim Kardashian no longer feel like a friend because their Stories are in a separate area now. Spiegel said this change is actually good because those celebrities were never their real friends anyway.
TechCrunch reported on Feb. 27 that, despite criticism about the app redesign, downloads rose 76% the week after the redesign was widely released in early February, according to data from mobile analytics company Sensor Tower. This could be a result of the old saying that "there is no such thing as bad publicity."
Investors will have to wait until Snap's next earnings report comes out in early May for some hard data on download figures. The company is under pressure to prove that the redesign is good for long-term growth despite the backlash. In other words, it needs a series of back-to-back quarters that look more like the fourth quarter of 2017 and less like the first three quarters of 2017.
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Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.