Investing in Snapchat

On Wednesday, March 1st, Snap Inc. (SNAP), the parent company of Snapchat, priced its public offering at $17 a share. The company closed on its first day at $24.48, displaying a 44% increase from the initial IPO price. Not only did shares soar above expectations, but Snap’s initial price of $17 was also valued above the original $14-$16 projected price only two weeks prior to the offering. Snap Inc. closed at $27.07 for the week on Friday, March 3rd. With this closing price, Snap’s market capitalization currently sits at just above $37 Billion.

snapchat-nyse-2017-billboard-1548
Snap Inc. Co-Founders Bobby Murphy (left) and Evan Spiegel (center) 

Analysts across Wall Street have debated whether or not Snap Inc. has positive long-term growth potential or if the mobile app is just a short-term concept that could end up losing popularity and stagnating like Twitter. Although many point out its slow user growth and absence of profit, others are more bullish on the company’s capabilities citing its brand potential as a camera company and its diverse set of current and future products.

Here, I’ll analyze the arguments surrounding the app that draws over 150 million daily users and explain why, overall, I’m bearish on the company.

User Growth & Competition 

Snapchat added an impressive 50 million daily active users (DAU) in 2016. However, just 5 million of those users came in the fourth quarter of the year (Q42016). In its S-1 document, Snapchat stated that increased competition was a prime reason why DAU growth rate was relatively flat in the early part of the quarter. The company added that  “Our business is highly competitive…If we are not able to maintain or improve our market share, our business could suffer.”

Snapchat’s competitors comprise of Facebook (including Instagram and WhatsApp), Twitter, LINE, Google (including YouTube), and Snow. Each of these apps holds a different competitive advantage ranging from international reach, including access in China, to a solid and growing user base. Currently, Snapchat, along with Facebook, Instagram, and YouTube, are all blocked in China due to government restrictions. While these social media giants have all been blocked, other apps have satisfied users’ needs. Apps like LINE and Snow have both been successful in cultivating a user base in China as well as other highly regulated markets such as Indonesia. The Korean messaging app Snow recently announced that it has an estimated 40-50 Million users in China, very impressive for the 1-year old project.

The Asian market is not the only area where we’ve noticed stagnating growth from Snapchat. According to their S-1 document, the company has also experienced slowed growth in Europe. Below, we notice how the app’s growth has begun to curb globally in the last half of 2016.

screen-shot-2017-02-02-at-1-43-34-pm

Snapchat may be late to the international arena as its smaller global competitors have already established a presence in available markets and domestic competitor Facebook recently launched its own version of Snap’s “Stories” feature for WhatsApp’s 1 Billion plus users as well as similar features on both Instagram and Messenger.

Monetization 

Like many social media companies, Snapchat monetizes their business primarily through advertising. Snap’s advertising products include Snap Ads and Sponsored Creative Tools like Sponsored Lenses and Sponsored Geofilters. At the end of Q416, the company recorded $404.5 Million in revenue, compared to $58.7 Million at the end of Q42015, demonstrating a 6x year-over-year increase. Even though these numbers may look promising, especially since the company is in its early advertising stages, they only show a snapshot (no pun intended) of their current circumstances.

Newscred recently did a study of Snapchat users are found that many users shy away from the camera company’s branded features. Less than 10% of users said they use the Snap Live Stories feature while only about 16% said they frequently watch Snap Discover Stories. Lastly, a minute 12% said they used Branded Filters on the app.

These features make up the core advertising offerings for the company, and if businesses are unable to garner their audience’s interest, they’ll be unable to sell their products. The study also reported that 87% of users “never buy something they saw on the app.” It looks like the app is being utilized more for its capabilities to allow people to connect with their communities than it is for its economic advantages.

Diversifying the Product Line 

Snapchat backed up its desire to be seen as a camera company with their release of Spectacles, sunglasses that allow the user to take hands-free videos and upload them to their memories. From there, the user can choose to either discard the memory or upload it to their story. The glasses are currently priced at $129 and have recently become available to the general public. As Snap expands into camera hardware, they will face even greater competition from the likes of Kodak, Samsung, and Sony whose capabilities exceed that of Snapchat’s.

This move does indeed strengthen the company’s philosophy and brand, but it also creates a product that appears to be a fad and a luxury item given its price point. The demographic for Spectacles is niche and similar to the demographic for GoPro cameras. Aside from its ability to record and upload videos to a user’s Stories, the product is identical to a standard pair of sunglasses.

bbishop_161111_1279_0013-0

This move from software to hardware may be a mistake for the young company that currently struggles with monetizing its advertising arm and will also have to juggle expanding its hardware line before users begin to lose interest.

Overall

Overall Snapchat has great potential given its current user base in America and its recognition with the all-desirable 18-35 age group. However, the company should look to quickly expand in markets outside of North America, particularly in Asia, before other apps gain insurmountable prominence. The company must also find a way to engage with its users in a more intimate and compelling format to generate higher ROIs for businesses.

Additionally, if Snap truly wants to brand itself as a camera company, then it should look at ways to do this that involve software. Introducing hardware into their product line may become difficult in the long run as companies with more sophisticated capabilities will be ahead of the game in terms of product testing, R&D, and global reach and presence.

For these reasons, my expectations on Snapchat’s long-term performance are generally low. I look forward to seeing the company’s tactics as it takes on many of the aforementioned obstacles and continues to grow short-term success.

Ali Punjani
Independent Business Blogger

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s