Why Snap Stock Benefits From Social Isolation

Douglas A. McIntyre

The coronavirus outbreak may benefit social media companies. This is true more than any other event since they were founded. It is particularly true for a public corporation like Snap Inc. (NYSE: SNAP), which has lived in the shadow of social media behemoth Facebook Inc. (NASDAQ: FB).

Snap, like Twitter Inc. (NYSE: TWTR), has never realized what Wall Street once believed was its potential to turn users into money. This despite a growth rate of users that has been impressive, but not blazing.

What Happens When No One Can Go Out

In general, social media stocks should do well when millions of Americans are locked down at home.

The number of Snap users has risen quickly. At the end of 2014, the count was 71 million. That was before a steep ramp upward. Daily active users rose to 107 million at the end of 2015, 158 million at the end of 2016, 178 million by the end of 2017 and 188 million to end 2018.

Since the start of 2019, growth has slowed sharply. Snap said that a redesign of its Snapchat product hampered growth after 2018. Snap added another 30 million daily active users by the end of 2019. If Snap can exit this year with user growth moving toward 300 million, it will be a game-changer.

User growth potential was seen as the major plus for Snap. Oddly, it has turned out to be a weakness because Snap has not delivered.

As horrible as it is to say, COVID-19 could get Snap to the 300 million level or beyond.

Snap’s Troubling Figures

When Snap posted its fourth-quarter results, reported revenue of $561 million was $2 million below analysts’ expectations. The company’s share price was beaten down by nearly 15%.

Between the third and fourth quarters of 2018, Snap’s revenue jumped 31%. Between the third and fourth quarters of 2014, revenue rose only 27%. Snap management said the lower growth to the 2019 holiday shopping season was due to it being six days shorter than in the prior year.

With profits still likely several quarters away, Snap needs to demonstrate to Wall Street that the company’s revenue was still on an upward path. No one on Wall Street agreed that a shorter shopping season was a reason for poor results.

Advertising, Advertising

The name of the game in social media is whether a company converts its users to ad dollars. Facebook has been a master at this. That is why it is considered the leader in the field. Facebook was able to turn 2.5 monthly active users into $71 billion in revenue in 2019.

Snap competes for ad dollars with the other large internet properties too. Alphabet Inc. (NASDAQ: GOOGL) owns the largest share of ad revenues, thanks to its Google search engine. Facebook has about 50% of the ad revenue.

Together, Google and Facebook are considered a duopoly, since they control about two-thirds of online ad revenue. Twitter is a distant third, and its inability to drive higher ad revenue shows just what smaller social media are up against. Inc. (NASDAQ: AMZN), the world’s largest e-commerce company, has decided to compete with Google for search ads. Given Amazon’s size and the number of people who visit its sites to make purchases, it will naturally take a large amount of ad revenue and push market share down for smaller rivals. Also, its algorithms allow ads to be more targeted.

Why Snap Has a Chance to Be a Player

At the end of last year, about half of Snapchat users were between the ages of 15 and 25. Another third were between 26 and 35 years old. Among Snap’s efforts to raise revenues are encouraging these users to check their Snapchat app more frequently and offering media, which include Stories, to keep these users engaged longer.

This strategy does not have a so-called wide moat. That is, it’s easy for other social media companies to duplicate. Facebook has concocted its own competition for Stories. Late last year the release of Instagram Threads represented competition as well.

While it’s still too soon to assess the impact of the Instagram and Facebook products, they are bound to take some market share because of their total user bases.

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 was not realistic to think that Facebook would give up.

What’s the End Game?

Where does Snap go from here, now that its main business has stalled? One of four places, based on strategic imperatives and corporate governance questions.

The first is to increase monthly active users, which has been a problem so far. The second is to raise its monetization of those users via advertising or paid media.

The third is for management and the board of directors to allow the share price to fall. Even a raider would have trouble with a takeover of Snap. That’s because of the concentration of voting shares.

Finally, there is the merger and acquisition route. A buyer would get a company with negative net income. However, its balance sheet is rich in cash and cash equivalents. It has no long-term debt or pension obligations as well.

In the current environment, with the stock market in hyperactive mode, which path the company will take is a matter for conjecture.