They Invented "Stories" But Mightily Struggle to Make Money

Today, I'm looking at Snap Inc. (Snapchat). It's a business that's pioneered a number of features, has 400+ million daily active users, and yet can't make money.

Here's what caught my attention: Snap grew revenue from $4.6B to $5.6B over the past few years (solid 22% growth), but they're still burning through $654M in operating losses annually. It's like watching someone get really good at making $100 bills while spending $120 to make each one.

What's covered in this report:

• How they've built a $5.6B revenue machine that can't generate actual profits

• Why their cost structure is so bloated that 53% gross margins still lead to massive losses

• The debt position that's quietly getting worse • How Evan Spiegel turned down $3B from Facebook (which looks less genius when you're still losing money a decade later)

• The 2018 redesign disaster that taught every startup why user feedback matters

The cautionary tales worth noting:

• Revenue growth means nothing if your cost structure is fundamentally broken

• Platform dependency killed their ad targeting overnight (thanks to Apple's iOS changes)

• Being "right too early" about AR is expensive when you're bleeding cash for years

The numbers that tell the story: They're spending $6.2B to generate $5.6B in revenue. Their operating margin is -11.6%. After 13 years and $10+ billion in losses, they're still not profitable.

For comparison, Facebook/Meta generated $79 billion of operating income in its latest twelve month period.

In summary, Snapchat has a ton of passionate users and should be able to keep innovating and growing with a fraction of its current cost structure. But trying to do that level of cost-cutting can crush morale in the process. The best lesson is to not let the cost bloat enter your business in the first place.

With that, I'll talk to you tomorrow.

Nick

TL;DR

• Snap runs Snapchat, the "anti-social media" platform with 453 million daily users sending disappearing messages and playing with AR filters

• Despite inventing Stories (copied by every competitor), the company has yet to generate anything close to the free cash flow of its competitors

• The positioning may finally be paying off as they lead the AR revolution with 12 million Snapchat+ subscribers generating $240M annually

• Key lessons:

  1. Being right too early looks exactly like being wrong, but surviving long enough with smart pivots can turn vision into reality

  2. How does Snapchat have nearly 5,000 employees? I don't understand how these companies get so big. I'm confident that they could have a status quo business, with the same potential upside, with 10-20% of their current headcount.

The 30,000-Foot View

Snap operates a visual messaging platform earning money primarily through advertising (91% of revenue) while positioning as the privacy-friendly alternative to Meta's data empire. The business model: 453 million daily users create content and engage with AR experiences while advertisers pay for full-screen ads, sponsored lenses, and location-based filters.

Key Stats:

• Market Cap: $12 billion

• TTM Revenue: $5.17 billion

• Gross Margin: 80.1%

• Net Income: -$698 million (improving from -$1.3B)

• Employees: 4,800+ (52% engineers)

• Industry: Internet Broadcasting and Web Search Portals

Revenue Mix:

• Advertising: 91% ($4.9B)

• Snapchat+ subscriptions: 5% ($240M)

• Other: 4%

The company generates 60% of revenue from North America, where it dominates the teen demographic with 90% penetration.

Company History

Act I: Dorm Room Origins (2011-2013) Stanford's Evan Spiegel built "Picaboo" for disappearing photos, rebranded to Snapchat after legal issues. Grew to 1 million users while rejecting Facebook's $3 billion acquisition offer.

Act II: Feature Factory (2014-2019)

• Invented Stories (2013), launched Discover media partnerships (2015)

• Spectacles hardware launch (2016) with yellow vending machines

• Disastrous 2017 IPO at $33B valuation despite zero profits

• Catastrophic 2018 redesign caused first-ever user decline

Act III: AR Renaissance (2020-Present)

• COVID drove usage surge, Snapchat+ launched (2022)

• My AI chatbot processed 20 billion messages

• Google Cloud partnership for Gemini AI integration

• Revenue accelerating at 16% YoY after years of stagnation

Show Me the Money

Stand-out Financial Features:

• Snapchat+ hit 12M subscribers generating ~$240M recurring revenue

• R&D intensity at 48.6% of revenue ($2.6B investment)

• North America ARPU ~$8 vs Rest of World ~$1

• Net debt slowly growing

Financial Data

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3/5 - Snap has a defensible but narrow moat, strongest in brand differentiation and AR technology.

Memorable Marketing

Snap creates cultural moments rather than traditional campaigns, understanding Gen Z despises obvious advertising.

Spectacles Vending Machine Hunt (2016)

• Dropped $130 camera sunglasses from mysterious yellow vending machines

• 24-hour countdown created scarcity that had people paying 10x retail on eBay

• Global media coverage worth millions despite $40M inventory loss

"Less Social Media. More Snapchat" (2024)

• Positioned as antidote to toxic social media during peak Facebook backlash

• Used neuroscience research showing Snapchat triggers "joy" vs competitors' "anxiety"

• Result: 10% user growth, 28% stock jump

Taco Bell Cinco de Mayo Lens (2016)

• Simple AR lens turning heads into giant tacos

• 224 million views in 24 hours, cost $0.00004 per view

• Users became the ad, generating viral sharing

Tactical Takeaways:

• Scarcity beats saturation every time

• Let users be heroes, not your brand

• Time launches to cultural moments

• Physical + digital creates unforgettable experiences

AI Uses & Opportunities

Current Uses: My AI chatbot (Google Gemini) serves 200M+ users, AI video lenses launched March 2025, AR creation democratized through Lens Studio.

Future Opportunities:

• Cost reduction: Automated moderation, AI-optimized infrastructure saving 30% on computing

• Product enhancement: Real-time translation, predictive AR, AI-powered memories

• New revenue: Lens+ subscription tier ($600M potential), enterprise AR tools, creator marketplace taking 20% commission

The real opportunity: becoming the "Shopify of AR" where every business builds their augmented reality presence.

Bumps in the Road

2018 Redesign Disaster: Spiegel's personal redesign generated 1.2 million signature petition for reversal. Kylie Jenner's tweet about not opening Snapchat anymore tanked stock 20%.

Spectacles Write-off: $40M inventory loss on sunglasses nobody wanted for a selfie app that couldn't take selfies.

Apple Privacy Impact (2021): iOS changes "rendered advertising tools blind," causing four straight quarters of revenue misses.

Child Safety Crisis (2024): New Mexico lawsuit alleges platform facilitates exploitation through disappearing messages.

Leadership Exodus: Nearly every IPO-era executive departed due to Spiegel's "ivory tower" management style.

Your Swipe File

1. Being different can be your moat Snap survived by being aggressively different. When Facebook copied Stories, they doubled down on AR. Find your different and protect it.

2. Users > Investors (but not too much) Dual-class shares let Spiegel ignore Wall Street for product focus. Smart. But ignoring 1.2 million redesign protesters? That's might just be a "too smart" kind of move.

3. Platform risk is existential One iOS update nearly killed their business. Never build your castle on someone else's land without backup plans.

4. Hardware is hardwear Software skills don't transfer to hardware. Spectacles failed because Snap underestimated complexity. Stay in your lane or hire experts.

5. Timing the future is essential but impossible Snap was "right" about AR in 2015 but the market wasn't ready. Markets are hard to time and being public creates short-term pressure performance.

6. How do they spend so much money on overhead?? I'm an active user of Twitter/X and have noticed very little degradation in performance of the platform after Elon Musk conducted dramatic cost-cutting (the content quality on X might be a different story but that's for another day). I can't help but imagine that many of this high-flying startups could have performed nearly as well with 10% of the overhead that they have now.