The first earnings report after a closely-watched tech IPO is always a nerve-wracking experience for investors, but the response on Wednesday to the first quarterly results from Snapchat’s parent company went beyond just nervousness and crossed over into shock-and-awe territory.
Snap’s share price (SNAP) plummeted more than 24% in after-hours trading, taking the stock to within a hair of $17, the price at which it sold its first shares in March. In all, the company lost more than $6 billion in market value in less than an hour.
Why so much negativity? The video-messaging app maker was expected to lose a lot of money in its first quarter, and many analysts were also prepared for it to show slower user growth. But the results were even worse than expected.
In total, Snap lost $2.2 billion in the quarter, on revenues of just $150 million. That means it lost about $14 for every dollar of revenue it made during those three months. And user growth was 36%, significantly lower than in the preceding quarter or the same quarter a year ago.
Snap user growth is almost zero. Losing $50 mil a month. This is so poorly run. Run and hide. This is worse than twitter. $snap $twtr
— Ross Gerber (@GerberKawasaki) May 10, 2017
As many other newly-public stocks have discovered, when your market valuation exceeds your tangible results by as much as Snap’s does, even a small miss is a huge red flag. And the user numbers likely fueled concern about competition from Facebook and Instagram eating into Snap’s market.
Instagram has copied virtually all of the major aspects of Snapchat. It recently announced that 200 million of its users use its “Stories” feature (which it coped from Snap) to share collections of videos and photos. Thats more than Snapchat’s entire user base.
Get Data Sheet, Fortune’s technology newsletter.
Slowing growth also raises fears on the part of some investors that Snap could turn out to be less like Facebook—which has grown into a $400-billion colossus—and more like Twitter, which has seen its growth slow virtually to zero, and its market value plummet as a result.
Most of Snap’s $2.2 billion loss came from stock-option grants to its employees, including one to CEO Evan Spiegel that was worth close to $1 billion. Some investors argue that stock options don’t represent real expenses, but others disagree. Facebook, for example, recently changed the way it reports its results to make the cost of such options more obvious.
$SNAP's operating margin was -1479%.
I'm not an accounting expert but that doesn't sound great.
— Alex Rosenberg (@AcesRose) May 10, 2017
Snap’s weak user growth is even more of a concern. Snap likes to talk about the engagement levels that Snapchat generates, with users spending an average of about 30 minutes every day, and more than 3 billion “snaps” being uploaded every day. But what many investors want is growth.
The number of daily average users did grow, but the growth rate was smaller than it has been in every preceding quarter, and that’s not the kind of trend that analysts or investors want to see.
In the fourth quarter, for example, daily users grew 48%. In the third quarter of last year they grew 62%, and in the quarter prior to that they rose 65%. The growth in the latest quarter looks especially bad when compared with the same quarter a year earlier, when the user base rose more than 50%.
Snap's daily active user growth slowed in the fourth quarter… number one focus from investors for earnings is seeing if that's a trend. pic.twitter.com/Li2H8jlDDM
— Sarah Frier (@sarahfrier) May 10, 2017
The company focused on a number of positive aspects of the quarter, not surprisingly. It noted that revenue rose more than 280% compared with a year earlier (although it was lower than analysts expected), and said it has seen “significant progress” in increasing advertising revenue as a result of introducing an automated ad service.
Snap also pointed out that its operating costs fell, in part because it renegotiated its contracts with Google and Amazon, which host most of the videos and images uploaded by Snapchat users.
“I feel we have executed well on our priorities for this quarter, and that we have a strong foundation as we build our business,” Spiegel said during some brief comments during the company’s conference call with analysts.
In response to a question about the company’s losses, chief financial officer Drew Vollero said that Snap is “still in investment mode,” and wouldn’t be sacrificing that to meet any short-term goals. “We are managing this company for the long term,” he said, adding that analysts shouldn’t expect any kind of revenue guidance in the near future.
