Snap Is Suffering From Major Engagement Problems

Things haven't been going well for Snap (NYSE: SNAP), as the Snapchat parent company approaches the one-year anniversary of going public. Shares trade at just a fraction of the IPO price, thanks in large part to the underwhelming daily active user (DAU) figures that Snap has been reporting each quarter. And DAUs (178 million at the end of Q3) are one of the few operating metrics that Snap actually shares with investors.

It seems that some of the metrics for other key Snapchat features are even worse.

The leaked data look awful

The Daily Beast has obtained a slew of internal data regarding specific Snapchat features, covering a period from April 2017 to September 2017, as part of a report on the company's obsession with secrecy. Beyond the cultural and morale implications of keeping employees in the dark, the figures paint a dire picture of Snap's struggle to grow into a mature social media platform. The vast majority of usage on the service revolves around sending basic photo/video messages, making Snapchat much more of a messaging service than a full-featured social media platform.

For example, just 11% of Snap's user base (19 million) accessed Snap Maps on a daily basis in the month of September, which doesn't inspire a lot of confidence in Snap's efforts to turn Snap Maps into a real-time news source. Snap Maps was expensive to build too, since Snap acquired Zenly for $213.3 million last May to develop the feature. That's an awful lot of shareholder money to waste if the intended feature flops with users, whereas the financial downside to internally developing features is much lower.

Snap is working on the most significant interface redesign in Snapchat's history, and plans on separating social content from publisher content that is currently found in its Discover section. However, there's a huge risk that doing so will adversely impact usage of Discover content, which is an extremely important component of the ad business. Jefferies downgraded Snap shares earlier this week, based in part on these same fears. In a separate but relevant data point, Facebook has been testing out a similar segregation in a few smaller markets and publishers have taken a hit.

Numerous media companies have been experimenting with creating snackable daily shows for Snapchat Discover. CNN was among them with The Update, but announced last month that it was pulling the plug in 2018. Snap apparently withholds detailed Discover DAU information from Discover publishers, according to the report, although it does provide publishers with some analytics for their channels. The leaked data suggests that just 20% of Snapchat users look at Discover episodes (called Editions) on a daily basis. There's a good chance that figure falls once the redesign rolls out more broadly, and that could in turn hurt interest among media partners and Snap's struggling ad business.

One saving grace is that users are extremely engaged on the messaging side, sending dozens of photo/video messages daily. But Snap relies on ads and sponsored products to actually monetize the service, while its costs scale hand-in-hand with that usage due to its outsourced hosting model. The company has already burned through copious amounts of cash, including losing $3.1 billion in the first nine months of 2017. If Snap can't put together a viable business, the company may prove to be ephemeral, too.

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Evan Niu, CFA owns shares of FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.