My Snapchat score is 123,182.
Despite my embarrassingly high score (which details how many snaps I have sent/received) and my frequent use of the app, I believe that Snap Inc. is a LOSER in the race among technology/social media titans for digital advertising dollars. Just like Google and Facebook, Snap has a mission statement that does not mention advertising, but that is the primary (by far) revenue source for each giant.
Although I believe Snap is more than underperforming, let me briefly discuss how the company has successfully created value since its creation in 2012:
- Innovation: What started as a service solely dedicated to sending ephemeral photos to friends, has turned into an application that allows all forms of communication. Users can currently message each other, send photos and videos, video call, and post “stories” of their days. Snap’s constant innovation has undoubtedly attracted users (178 million Daily Active Users (DAUs) and 300+ million Monthly Active Users) and kept those users engaged (the average user spends about 30 mins on the app. These numbers are very impressive, but will they continue to grow?
- Volume: With any service that monetizes through ads, engagement and volume are critical components of financial success. Snap has seen tremendous growth in the amount of communication on its application…. Here are some fun facts!
- Demographics: Snap serves as an attractive platform to advertisers primarily because of its 53% of users in the coveted advertising age group of 18-34. As advertisers increasingly seek ways to reach that targeted age range with the decline of TV viewing, Snap and other digital apps can fill in the gap. It’s also estimated that 77% of college students use Snap!
Since its IPO in March 2017, Snap’s market cap has declined from a high of $31.4 billion to $16.2 billion today. Although a (large!!) fall in market cap does not necessarily dictate future performance, I think that Snap will have a difficult time regaining momentum even with its strengths listed above due to the following challenges:
- Competition: Everybody is familiar with Facebook’s copycat attack on Snap. It only took Instagram Stories, a direct product copy of Snap Stories, seventeen months to get to 500 million DAUs, far surpassing Snap’s 178 million. 178 million DAUs is still a lot, right? Yes, but not when advertisers are searching for the most eyeballs. A January 2018 study by a financial analyst who interviewed 50 ad buyers showed that the ad buyers “overwhelmingly” preferred advertising on Instagram over Snap. Although Snap has been a great innovator, how will it defend itself against Facebook and its multiple billion user platforms? Surely anything that Snap continues to introduce, Facebook can again copy. Will it have some breakthrough proprietary innovation that will turn the tides? I am guessing no.
- Talent: The technology industry is no stranger to employer turnover; the average employee at Snap will work there for 1.62 years. However, Snap has had seven key executives depart the company since its March 2017 IPO. The employees that have left include the VP of Product, Head of Engineering, General Counsel, Chief Security Officer, and a Content Development executive. Surely this is not a good sign for the company.
- Stalled Growth/Poor Decisions?: Snap shares recently plunged 20% of missing third quarter expectations. Snap’s posted revenue of $207.9 million was well below analyst expectations of $236.9 million and posted a net loss of$443.2 million. More importantly, DAUs only grew 3% in the quarter, the slowest quarterly growth in its history. In response to the disappointing results, Snap is planning and has recently released to some users a complete redesign of the app. Will the app, which I also think can be complicated to use, become more intuitive for users? We’ll see, but I am a doubter. Let me also briefly mention Spectacles, Snap’s Google Glass equivalent. Snap lost $40 million in this endeavor as most of the Spectacles are stuck as inventory.
Ultimately, these challenges will make it difficult to attract advertisers to the application. Will the company simply collapse? I don’t think so. But, if I were an advertiser, I would look elsewhere.