To say that Snap Inc (NYSE:SNAP) has had a tough go of it since its March 2 IPO would be quite an understatement. It’s (mostly) one of the analyst community’s favorite punching bags, and despite a good first couple of days as a publicly traded company, SNAP stock is now down more than 30% from its March 3 high. Not good.
As is the case with all companies, though, not everything the parent company of online messaging service Snapchat does is a trainwreck — there are some things you have to appreciate about the organization. One of those is Snap’s recently updated advertising-bidding platform, which takes so-called goal-based bidding to the next proverbial level.
Advertising giants like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) may want to take notice.
SNAP Stock’s Goal-Based Bidding
If the topic and names seems strangely familiar, it may because it was only a week ago Facebook officially launched its version of header bidding … a means of real-time buying and selling of ad space that’s more transparent for the buyer and the seller. The publisher knows how much it will be earning per click, and the advertiser knows how and where its ads will appear. The win-win scenario means more efficient spending of advertising dollars.
That evolution is just a microcosm of the ongoing improvement of the web’s advertising business though. Goal-based bidding is another natural evolution of the business, and one of the few things SNAP stock holders have to feel good about at this time.
In short, goal-based bidding is exactly what it sounds like. That is, a payment not for an ad impression or a click, but a specific action. In the case of Snapchat, the primary goal its advertisers are seeking is the installation of a particular app. Once the app is installed on a phone or tablet, revenue becomes infinitely easier to extract from that user.
It’s not actually a new idea, though it’s not an old one either. The market for revenue-bearing app installations is only expected to reach $7 billion by 2020. But, it’s a model that plays right into the hand Snap is holding with Snapchat. Whereas users know they can always download an app they found via Facebook or Google, the fleeting nature of Snapchat’s messages often makes an app installation a ‘now or never’ proposition. Out of fear, those consumers often choose ‘now.’
The Downside of More Efficient Bidding
There are two sides to every coin, of course, and the downside for SNAP stock owners is simply that the more efficient and granulated web advertising becomes, the cheaper it becomes (on a per-click or per-impression basis) for the advertiser, and the less lucrative it becomes for the middleman. Performance-based ad revenue will only exacerbate this trend.
One only has to look at the recent results from Alphabet’s Google to recognize the adverse undertow. The company’s “aggregate cost-per-click” fell 11% last year and the year before, aligning with the premise that advertisers are getting even pickier about their spending as they glean more specific data about users simply because they can.
It’s in stark contrast to the early days of the web, when advertisers would pay a steep price for placement on high-traffic sites and then hope for the best.
One could point out that Snapchat will limit its advertising of a specific app to only the users most likely to install a third-party app, and then cash in big-time when that individual hits the ‘install now’ button. In the aggregate though, it remains to be seen if the highly narrowed revenue path leads to more revenue, or less. Remember, up until this point, better-targeted web advertising has lowered its overall cost as publishers/venues become more competitive and ad inventory becomes more of a commodity.
Bottom Line for SNAP Stock
Kudos to Snap for having the foresight and guts to make this kind of commitment to its advertisers. Although the messaging platform will continue to take a small cut every time an ad is displayed, one has to presume the big payouts will only come when users install an app … something most of them (perhaps all) will never actually do.
From that perspective, advertisers will have to love the low-risk/low-cost approach to promoting themselves.
As for SNAP stock holders though, goal-based bidding still isn’t enough to suggest the company is going to grow into its lofty valuation anytime soon. One has to presume that at least Facebook if not Alphabet’s Google will counter with something similar, deflating Snapchat’s advantage and sustaining the downward pressure on internet advertising prices.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
