Snap’s earnings sent its stock up more than 20 percent, but user growth remains a real concern

Snap finally had a good day. You might even call it a great day.

That’s because, after a tough year in which Snap execs and investors watched the company’s stock price slowly bleed out because of government investigations, executive departures, and product issues, Snap reported better-than-expected earnings on Tuesday that shot the stock up more than 22 percent in after-hours trading.

The main reason: Snap’s business last quarter was stronger than anyone thought. Sales were up to a record $390 million, a 36 percent jump over the same quarter a year ago. And Snap is slowly moving toward profitability, a goal that CEO Evan Spiegel shared internally with Snap employees last year.

All of this came despite the fact that Snapchat’s total user base didn’t grow in Q4. Snap had warned people that the app’s user base might shrink, so simply “not growing” could actually be seen a positive. Still, Snapchat shrank in 2018. The company ended the year with 186 million daily users, down from 187 million users a year earlier. Which isn’t a great sign.

What is a good sign is that Snapchat can still grow its business even if it doesn’t add new users. Advertising companies increase sales by either adding more users or selling more ads. Successful ones, like Facebook, do both. Snap has talked about its need to increase ad sales since its IPO, so it’s a positive sign that the company is actually doing it.

But Tuesday’s rain cloud — if there is such a thing as a rain cloud on a day in which your stock jumps 22 percent — is that Snap’s plan to grow its user base is the same plan it has been touting for some time now. And that plan has some flaws, and a lot of uncertainty.

Snap’s user growth solution at this point is tied to just one thing: A new version of the Snapchat Android app that the company has been working on since late 2017. It still hasn’t been rolled out to a meaningful portion of Snapchat’s user base.

Snapchat differentiates itself with a lot of fun camera filters and video features that rely heavily on the in-app camera. Building that camera for thousands of different Android phones, in markets where connectivity isn’t as strong or reliable as it is in the United States, has been a problem for Snap. The company claims that its Android problems have hindered user growth, too.

That appears to be the case. Even though Snapchat’s user base stayed flat last quarter, Snapchat added users through its iOS app. That means it lost users on Android. Getting the Android app to work seems to have become Snap’s top priority.

“We’ve shifted most of our resources internally to the rebuild of Android,” Spiegel told analysts Tuesday on the company’s earnings call. Spiegel says he’s “really excited” about what the company is seeing from some early tests with the new app, especially with users who have older or “lower-end” phones.

“I think there are some incremental customers who just can’t use our product today on lower-end phones that will be able to use it in the future,” he added. “For comparable devices, I do think that the Android experience can certainly be equal to or even surpass what we see on iOS.”

The concern is that Spiegel has been talking about this new Android app for more than a year now. The general rule of thumb in advertising businesses like Snap’s is that revenue growth often lags behind user growth. That means that even though Snap hasn’t grown its user base for three straight quarters, the company may not feel the financial impact of that stagnation until sometime in the near future.

The best way to avoid it? Start growing your user base again.

As you would imagine, Spiegel is optimistic that the company’s Android redesign will eventually turn things around.

“There’s roughly 2 billion or so — maybe more [than] 2 billion people who are on Android and don’t have Snapchat,” Spiegel said Tuesday. “So if we can take a few percent market share there, it would make a real difference to our user base.”