SA国际传媒

Morning Markets: Snap reported earnings yesterday. The public social media company鈥檚 results contained some useful lessons for later-stage, private companies. Let鈥檚 explore the public market鈥檚 current views on profits versus growth.

, parent company of the popular Snapchat application, its third-quarter results yesterday after the bell. As a company Snap has been on a well-documented rebound for some time; the company has traded for under $5 per share inside the last year despite being worth over $14 per share during yesterday鈥檚 regular trading.

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Its latest numbers paint a picture of a company still struggling with its cost structure, recapitalized with debt, and growing its revenue at a good clip.

To back that up, let鈥檚 peek at the numbers. Snap鈥檚 revenue grew 50 percent in Q3 2019 compared to the year-ago period, from $297.7 million to $446.2 million. Over the same time period, its net loss fell 30 percent from $325.1 million to $227.4 million.

Other negative metrics also improved, including its free cash flow (from negative $158.8 million in Q3 2018 to negative $84.1 million in the most recent quarter) and adjusted EBITDA (from negative $138.4 million to negative $42.4 million).

Wall Street had expected a larger adjusted loss, and revenue of $437.9 million. On the back of that double-beat, you might expect that Snap鈥檚 stock is up today. It isn鈥檛.

After Snap reported its results, its shares fell. Why? Because the deeply unprofitable company isn鈥檛 projecting the sort of growth that Wall Street expected, :

Snap said that it expects to report adjusted Ebitda of up to $20 million on revenue of $540 million to $560 million in the holiday quarter, which is typically its largest of the year thanks to increased advertising budgets; analysts on average were projecting a break-even quarter on an adjusted basis with sales of $555 million, according to FactSet.

If Snap manages to land at the top of its revenue forecast, then, it will only beat expectations by a smidge. At the low end of its range, it would miss by three times that amount. So, despite Snap鈥檚 strong Q3, its slower-than-expected Q4 forecast cost it dearly.

Let鈥檚 parse that a bit, and relate the lessons to the private companies that make up our regular fare.

Growth

In the past, companies that went public were usually profitable. In recent years, with the private market flush with cash, companies going public have , though often growing extremely quickly. There鈥檚 a bit of a trade off: a company going public today tends to be either a high-growth company, or profitable-ish.

And as most startups in today鈥檚 market select the high-growth model (venture capitalists often advise startups to focus on growth), you can see how the IPO market has shifted towards that choice.

Snap focused on growth over turning a profit before and during its IPO; it has yet to break even as a public company. Things haven鈥檛 changed since. Snap has had to raise debt, and has a long way to go to reach free cash flow breakeven, let alone adjusted profit or GAAP net income.

As we saw above, Snap posted good growth momentum in Q3. But if the company posted strong revenue expansion, why are investors trading its shares down? Because slowing growth makes its current lack of profits less palatable. Investors are now accustomed to Snap鈥檚 quick revenue growth and clearly aren鈥檛 happy to see it fall under their expectations; slower growth means lower implied future cash flow and profit, let alone a longer ramp to gross profit covering costs. And when cash flows and profits are lower, investor returns tend to be lower as well.

No Rest For The Glow Up

So even Snap, on one of the biggest public market glow-ups of last year, is still on a knife鈥檚 edge. It can鈥檛 afford to post slower growth if it wants to be valued as highly as it was this summer, given its losses.

Maybe this is all to say, if you鈥檙e going to grow fast and go public, you鈥檒l need to keep the growth up if you aren鈥檛 cleaning up your losses at the same time. Growth stocks tend to have volatile stocks. Why? Becaused missed results can sternly correct investor expectations; Snap has seen that happen to its benefit and detriment during its life as a public company.

For startups, perhaps we can take this as a lesson to lower your burn a bit while keeping growth as high as possible. Investors like to see more-than-tidy revenue expansion (at this point, they鈥檝e been conditioned to) but they鈥檒l be less than thrilled if the consequences of growing fast catch up with you.

And that鈥檚 as true today for private companies as it is their public siblings.

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