(Bloomberg) -- Snap Inc. shares fell the most in about two months after the company reported its first-ever drop in daily active users. But revenue gains in the second quarter proved that the company is making headway in the mobile-advertising market dominated by Facebook Inc. and Google.
The declining user numbers at Snapchat, attributed to an unpopular app redesign, worried analysts who were looking for rapid growth, since the app is still much smaller than Facebook and Instagram. Still, Snap exceeded expectations for quarterly sales and won the endorsement of a key investor with a $250 million share purchase by Saudi billionaire Prince Alwaleed Bin Talal.
After a tumultuous first year as a public company, Snap for the first time offered a revenue forecast, indicating that it has a clearer understanding of its business potential, even after shifting strategies, cutting staff and cycling through managers. Snap recently appointed a new chief financial officer, Amazon.com Inc. veteran Tim Stone, who helped improve the company’s transparency.
“There has been a disconnect over the past year between trends at the company and Wall Street expectations,” said Brian White, an analyst at Monness Crespi Hardt & Co., in a note to investors.
Shares of Snap fell as much as 8.2 percent, the most intraday since June, to $12.04. The stock had declined 10 percent this year through Tuesday.
Second-quarter sales climbed 44 percent from a year earlier to $262.3 million, Snap said Tuesday in a statement. That exceeded the $249.8 million average analyst estimate. Still, the company said second-quarter daily active users fell 2 percent from the previous period to 188 million, missing the average projection of 193 million.
The three months ending in June was the first full quarter in which all users shifted to a new version of Snapchat that separates content from a user’s friends and from public figures. The overhaul turned some users away, and more people are flocking to Facebook’s Instagram, a rival photo-sharing mobile app that has successfully copied Snapchat’s most popular features.
“The drop in Snapchat DAUs will be worrying if it is more than just a blip, especially if the drop is due to competition from Instagram,” said Nilufar Fowler, worldwide central chief executive officer of WPP Global Media Agency Mindshare.
The Los Angeles-based company noted that monthly users -- a number it has never reported -- are still growing. Snap has more than 100 million monthly users in the U.S. and Canada. Yet the company’s average revenue for each user is a fraction of Facebook’s.
Despite its progress, Snap has a long road before it can offer a viable alternative to ads by Facebook and Google, said Brian Wieser, an analyst at Pivotal Research Group. “It’s not a competitor,” he said. “It’s a niche platform. Like Twitter and Pinterest, they serve a very specific role for a very specific kind of advertiser.”
Third-quarter revenue will be $265 million to $290 million, Snap said. Analysts on average projected $289.9 million, according to data compiled by Bloomberg.
Alwaleed’s Snap stake, completed in May at an average share price of $11, is the second major tech investment he has disclosed since his release in January from detainment in a government-led crackdown on corruption. Last Thursday, the prince announced he’d invested 1 billion riyals ($267 million) in music-streaming company Deezer through his investment vehicle, Kingdom Holding Co., and his closely held media company Rotana Group.
“Snapchat is one of the most innovative social media platforms in the world and we believe it has only just begun to scratch the surface of its true potential and we are blessed to be part of it,” the prince said in a statement.
--With assistance from Devon Pendleton.
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