Aug 9, 2018 ยท 6 minutes

Something big is happening in social media, and investors in social-media companies can't make up their minds what it is.

Facebook's daily active users rose 2% from the previous quarter. Its revenue rose 43% year over year. Its stock fell 20% on its earnings report.

Twitter's DAU is up (we think - the company still won't give actual figures). Its revenue rose 24% year over year. Its stock fell 21% on its earnings report.

Snap's DAU was down 2%. Its revenue rose 44%. Its stock fell 7% on its earnings report.

Coming into these figures blind, one might conclude that the audiences of these social networks have all saturated. That something must be wrong if investors are kicking companies with revenue growth above 20%. And that Snap, like Jake Gittes, is the leper with the most fingers in this town.

And while all of those statements greatly oversimplify things, there is an element of truth in each of them. Facebook's usage is saturating because of its scale. Snap's because of a botched redesign. And Twitter because, well, it's Twitter. Investors aren't kicking them because of revenue growth, but because of the social costs of that growth. Social media stopped being exciting long ago. Now the problems are much more obvious. And investors, unsure of what this means, take any sign of weakness as a sell signal.

And Snap? It was the only social network of the three to see those problems coming years ago. It refused to embrace the creepiness inherent in the fastest ways to monetize social content. But once it went public, it quickly faced the same pressures to make money that Facebook and Twitter do. Snap chose the harder ways to monetize its users. As a result, it's made money in fits and starts.

To date, that has meant more fits than starts. Snap's stock initially rallied on its earnings report because its revenue was larger than, and its loss smaller than, expectations. Revenue was helped by the shift to a programmatic-ad platform, which was especially successful in Europe and Asia. The costs weighing down losses were lightened after Snap laid off 7% of its workers in March. 

As for the drop in its daily users, that was largely expected, given the poor reception to the Snapchat redesign. There's hope that the worst is behind Snap on that front, but executives discussing earnings this week kept refusing to answer repeated questions about whether the decline in users was in fact over. Instead, Evan Spiegel focused on two metrics: Users spent more than 30 minutes a day in Snapchat and shared more than 3 billion snaps a day. 

Spiegel touted those last two stats like they were good news. But he offered the exact same metrics in the first quarter of 2017, Snap's first quarter as a public company. 

So Snap continues to struggle for traction more than a year after its IPO. Which is too bad. Snap is the kind of platform people claim they want to use when they dis Facebook and Twitter, without ever deleting either. The whole idea of a snap from the beginning was that it was ephemeral, the kind of feature that preserves user privacy at the expense of quick revenue growth.

For those concerned about the toxic aspects of social networks, a depressing trend is that users are still going where the other users are, not where the privacy protections are. That's evident at Instagram, which now has more than 400 million people using its Stories feature. CEO Kevin Systrom told Buzzfeed last week that when Instagram Stories launched, “it basically was Stories,” that is, Snapchat Stories. 

Systrom realized Stories could solve a growth bottleneck on Instagram: people were holding back on posting photos unless they were “amazing,” he said. But that wasn't the plan from the start, it was just a solution Systrom discovered along the way. The plan was simply... cut-and-paste. Copy Snapchat's best features and plug it into the massive scale Facebook provides its apps. And as innocuous as Instagram seems to most users, it is still part of the Facebook ad machine, a friendlier face on a ravenous data monster.

One telling revelation in Snap's earnings call came when Imran Khan said, “In terms of GDPR impact, we have not seen any material impact.” One reason for Facebook's post-earnings stock plunge was the impact that GDPR had on its ad-driven business in Europe. It's not clear if Instagram was hurt by GDPR, but Facebook saw DAU fall by 3 million in Europe to 279 million last quarter. Yet, apparently, Snap has emerged unscathed so far because it had less exposure to begin with. 

Which brings us to Facebook's stock plunge.

When Facebook's earnings brought about its now fabled $120 billion loss in market value, I doubt Mark Zuckerberg freaked out, although he no doubt disliked the look of egg on his face. I was on vacation and learned about it because my wife – who has zero interest in financial markets – asked me what I thought it meant. I said it sounded like an over-reaction to an overpriced stock and then forgot all about it for the rest of my trip.

Once I had a chance to look deeper into Facebook's numbers, nothing changed that off-the-cuff assessment. Yes, $120 billion is a fuck of a lot of value to lose in a single day, but it erased not months or years of gains but less than three months of gains. Facebook's stock not only added a fuck of a lot of value during those few months, it's been adding a fuck of a lot of value every few months for the past five years.

Early July in particular was a heady period for the stock. Facebook rose 13% in the two weeks before its fateful earnings report, valuing the stock at more than 40 times earnings. Anyone who bought Facebook at a P/E of 40 has no credible complaint about getting burned. Couple that with Facebook's history of warning that revenue growth would slow when it never really slowed as warned. Well, the wolf Facebook has been shouting about for some time finally showed up at its door.

If, however, you had bought Facebook the day after its earnings, you'd be doing pretty well now. Its stock price declined a bit for another few days, but (unlike Twitter) it has risen enough to add $56 billion to its market cap since the low point. It may be just another few weeks before Facebook is back to an all-time high. When it is, you won't read any headlines about Facebook adding $120 billion to its market cap, because that's a dog-bites-man story.

In late July, Facebook's plunge prompted a lot of analysis arguing that the social network had peaked, which was followed by more analysis pooh-pooing the notion that Facebook was failing. Both statements aren't incompatible, and both are probably true. Yahoo shares peaked in 1999, yet it remained popular with many users for another five or six years – and then bled out slowly for years after that. The withered remains are still kicking around today.

Contrast that with Amazon, which too had a (temporary) peak in 1999, but since then has seen its stock rise nearly 20 times above that dot-com peak. I think the most interesting thing about Facebook's earnings – culminating nearly two years worth of terrible press about its outsize shortcomings – is that it's now more clear than ever that Facebook is closer to being another Yahoo than another Amazon. It will always be with us, but its sway on our lives may diminish over time.

In a better world – that is, a world where consumers made decisions that were best for them rather than the easy ones – Snap would be the company with the most users. Instead, we have Yahoo with a case of gigantism – that is, Facebook and its inferior platform we use only because everyone else does. And Snap being pressured more and more each quarter to ape Facebook.

And therein you have the key difference between Facebook and Snap. Snapchat was a good idea that the company hasn't been able to scale. The only good ideas Facebook ever had were about how to scale.