Snap Scrambles to Restructure Amidst Stalling Ad Revenue

Snap is undergoing a major internal overhaul, restructuring its 5,000-person workforce into small “startup squads” of 10 to 15 people. The move, announced by CEO Evan Spiegel in an annual letter, comes as the company faces significant challenges, including a stalled advertising business and intense competition from rivals.

The restructuring follows a difficult quarter for Snap. Its advertising revenue growth was just 4%, a slowdown from the double-digit growth seen in previous quarters. At the same time, its North American daily active users decreased by 2% to 98 million, a concerning trend in its most important market. The company’s ad-buying platform also experienced a technical glitch, which caused ads to be delivered at a reduced cost. This combination of factors contributed to a nearly 21.5% plunge in Snap's shares in early trading, potentially wiping out nearly $3.24 billion in market value.

Analysts are skeptical of Snap's ability to compete. According to MoffettNathanson, the company lags behind competitors in connecting advertisers with users, providing diverse marketing tools, and demonstrating a clear return on ad spending. Morgan Stanley analysts also noted that to capitalize on user engagement, Snap must better prove the effectiveness of its ads to advertisers. This year, the company's stock has declined by more than 10%, while rivals like Meta and Reddit have seen their shares rise by 30.3% and 21.8%, respectively.

While faced with challenges, Spiegel pointed to some encouraging growth areas. The Snapchat+ subscription service is a significant success, bringing in over $700 million in annual recurring revenue from more than 15 million paying users. Spiegel noted that direct revenue is a key growth opportunity, signaling a move away from the company's dependency on advertising. Additionally, Snap is focused on the future of augmented reality, continuing to advance its Specs AR glasses, a technology Spiegel sees as a major generational transformation.

While Spiegel acknowledged that the current stock price “reflects doubt,” he also pointed to the company’s current valuation of approximately $12 billion as having “startup-style return potential.” This figure, however, is a substantial decrease of 90% from its peak valuation of over $116 billion in September 2021.