How Snap Stock Can Snap Back

Wachiwit / iStock

When Snap Inc. (NYSE: SNAP) reported fourth-quarter results earlier this month, revenue of $561 million was just $2 million shy of analysts’ expectations. The company’s share price was hammered down by nearly 15%.

The punishment hardly seemed to fit the crime. The revenue miss was not the crime, however. The crime was slowing revenue growth.

Between the third and fourth quarters of 2018, Snap’s revenue rose by 31%. Between the third and fourth quarters of last year, revenue grew by nearly 27%. The company attributed the lower growth to the 2019 holiday shopping season being six days shorter than in the prior year.

With profits still a distant goal, Snap needed to show Wall Street that the company’s revenue was still on an upward trajectory. A shorter shopping season struck investors as an excuse.

It’s a Mean Old World

Snap competes for ad dollars with the biggest names in the internet advertising game. Alphabet Inc. (NASDAQ: GOOGL) owns the largest share of ad revenues thanks to its Google search engine. Facebook Inc. (NASDAQ: FB) snatches about half as much ad revenue as Google, but it continues to close the gap. Twitter Inc. (NYSE: TWTR) is a distant third.

Then there’s the new kid on the block: Inc. (NASDAQ: AMZN). The world’s largest e-commerce player now competes with Google for search revenues with its own built-in search function. This is a powerful concept.

People often go to Amazon with the express purpose of buying something. Making it easy for users to compare similar items using its search function and selling ad space around the results at a premium price has boosted ad revenues sharply. In the fourth quarter, Amazon’s ad revenues totaled $4.8 billion, a year-over-year increase of 41%.

How does a social media platform like Snap sell enough brand advertising to compete with Amazon, where users are ready to spend and advertisers are willing to pay serious money to try to influence the purchase decision?

Eyeballs May Not Be Enough

Since the day of its initial public offering in March of 2017, Snap stock has never traded above its IPO price. The stock hit its low point in late 2018, falling about 80% below the IPO price. Shares have clawed back more than half of that decline but still trade down by about 35% since the IPO.

Snap’s earnings reports, like those of other social media companies, include counts of daily active users. In the fourth quarter of 2019, the company reported 218 million daily active Snapchat users, a sequential increase of 8 million and a year-over-year increase of 32 million.

Facebook reported more than 1.6 billion daily users, up by more than 100 million year over year. Twitter reported 330 million monthly active users in the fourth quarter, and newly public Pinterest Inc. (NYSE: PINS) reported 335 million.

Snap’s challenge is somehow to wring more value out of slowing user growth. Following Snap’s recent earnings report, Canaccord Genuity analyst Maria Ripps observed that the key to boosting revenue per user was “bringing more advertisers to the platform,” along with more innovation in advertising products.

What Does Snap Have to Offer

At the end of the third quarter of last year, 53% of Snapchat users were between the ages of 15 and 25. Another 34% were between 26 and 35 years old. Snap’s strategy to boost revenues appears to be encouraging these users to check their Snapchat app more often and offering platforms like Discovery and Stories to keep these users engaged longer.

The problem with that strategy is that it is relatively easily duplicated. Facebook lost little time building its own challenger to Stories, and last fall’s release of Instagram Threads dented Snap’s share price.

While it’s still too soon to assess the impact of Instagram Threads on Snapchat, the salient point is that Instagram’s owner (Facebook) has a virtually unlimited war chest and a seemingly visceral need to stomp on Snapchat, if not to stamp it out entirely.

An early Facebook clone of Snapchat called Poke was released in 2012, barely a year after Snapchat debuted. Facebook shut it down two years later, but over the past five years has launched and closed several other clones of Snap. It’s not realistic to think that Facebook will give up.

CEO Evan Spiegel owns more than half of Snap’s voting stock. He controls the company in the same way that Mark Zuckerberg controls Facebook. Snapchat was a big idea, but Spiegel needs another one — and he needs it soon. Tinkering around the edges won’t fend off Facebook forever.

Want to Retire Early? Start Here (Sponsor)

Want retirement to come a few years earlier than you’d planned? Or are you ready to retire now, but want an extra set of eyes on your finances?

Now you can speak with up to 3 financial experts in your area for FREE. By simply clicking here you can begin to match with financial professionals who can help you build your plan to retire early. And the best part? The first conversation with them is free.

Click here to match with up to 3 financial pros who would be excited to help you make financial decisions.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.