Updated with Tencent investment and Wednesday share price

Shares of Snap Inc. plunged in after-hours trading Tuesday after the company behind the Snapchat messaging app reported user growth and revenue below what market analysts had forecast.

Snap reported third-quarter revenue of $207.9 million, up 62 percent compared to the same quarter in 2016 but below the $235.5 million expected by analysts. The company’s net loss for the quarter came in at $443 million or 36 cents per share — double what analysts had forecast — compared with a loss of $124.2 million, or 15 cents per share, a year ago.

User growth also rapidly slowed to its slowest rate in more than five years. The number of users rose only 3 percent, or 4.5 million, to 178 million, from the previous quarter.

What’s more, ad prices dropped through the floor, falling 60 percent from a year ago. Snap Chief Executive Officer Evan Spiegel blamed the company’s move to automated advertising for the declining rates. In a statement he said that “efforts at automation have gained traction very quickly this year, with 80 percent of Snap Ad impressions delivered programmatically in Q3, up from zero percent one year ago.” The problem, he added, was that “the speed of this transition surpassed our expectations,” which “dramatically reduced pricing as advertisers move from direct sales to our unreserved auction.”

There was a silver lining in the ad situation, however, with less of an exclusive dependence on large advertisers. “The expansion of revenue from small and medium-sized business can be positive, at least to the extent that this reflects a new advertiser market for Snap to target,” Brian Wieser, an analyst with Pivotal Research Group, wrote in a note to clients. Nonetheless, he still rates the shares a sell.

As first reported by The Information in October, Spiegel also confirmed that Snap had made a grave error in judgment in its attempts to sell Spectacles, custom sunglasses that record video. He said in an investor call that executives had “misjudged” the popularity of the product and that it has added a onetime $40 million expense to its balance sheet because of “excess inventory and purchase commitment cancellations.”

Still, Snap’s problems appear to go beyond missteps to the very appeal of the site, which the company essentially admitted has limited appeal. In an attempt to arrest its decline in user growth, Spiegel said Snap is looking to redesign the core Snapchat app to make it easier to use for a broader subset of people. But he also warned that “there is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behavior of our community will change when they begin to use our updated application.”

Another problem for Snap is competition. Facebook Inc.’s Instagram service, whose user base is both larger and broader than Snapchat’s largely under-26 crowd, has essentially copied a number of Snapchat’s most popular features. That is believed to have had some impact on Snap’s user growth.

Not surprisingly, investors were not happy with the results. Snap’s share price plunged more than 17 percent in after-hours trading after closing regular trading up nearly 2 percent, to $15.12 a share. Even that was down significantly from its February initial public offering price of $17 per share and an all-time high of $27.09 per share reached March 3.

Update: On Wednesday, shares continued to fall, down more than 18 percent despite an apparent vote of confidence from Chinese internet giant Tencent, which took a 10 percent stake in Snap, according to documents released Wednesday. Wieser said in another research note that Tencent’s investment shouldn’t affect Snap’s valuation because it’s unlikely either that Tencent would buy Snap or that the investment would lead to a Snap presence in China. “That said, any time a given investor – whether a company or random billionaire – makes a big investment it can help to convey that at least someone out there believes in the long-term potential for the company,” he said.

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