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Why Snapchat’s User Base Is Shrinking

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Aug. 9 2018, Updated 9:55 a.m. ET

Snapchat’s user base declined for the first time

In the second quarter, Snap (SNAP) reported a sequential decline in its user base for the first time. Its DAU (daily active users) declined 3 million to 188 million, and the company suggested that the near term could also be bumpy.

Snap’s declining user base at such an early stage is alarming and sent its stock tumbling. Facebook (FB), which has a much larger user base, saw an addition of 22 million DAUs in the second quarter.

Snap blamed its shrinking user base on its infamous app redesign in February, which caused a massive user revolt.

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Instagram remains Snapchat’s biggest headwind

The rationale of the Snapchat redesign was to separate users’ personal messages from the content of celebrities and advertisers. The company rolled back some of the changes in the second quarter, but it hasn’t had a significant impact on user growth yet.

The redesign seemed to have a tangible impact on Snapchat’s DAU, but the platform’s user growth had already started slowing down after Instagram cloned its popular Stories segment a couple of years ago. Instagram now has more than a billion users.

However, Snap’s declining user base might mean there could be more downside to the stock, which is still trading at shaky valuations. Snap is trading at 9.5x for its 2019 book value compared to Facebook’s at 7.7x.

Next, let’s look at Snap’s improving monetization efforts, which could boost its revenue growth, although its declining user base at such an early stage is not a good sign.

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