Last week, Bloomberg reported that Snapchat passed Twitter Inc (TWTR) in daily usage. According to Bloomberg’s source, Snapchat now has 150 million daily active users compared to TWTR’s 140 million estimated daily actives.
Furthermore, Snapchat’s user growth is staggering — up 36% in the last six months. Twitter, meanwhile, has seen its monthly user growth completely stall, and user engagement has yet to improve despite several product initiatives.
But Snapchat’s user growth isn’t even the biggest threat to TWTR stock. Snapchat is still in the early days of monetizing its platform, and it’s going directly after Twitter’s bread and butter — brand advertisers.
That’s especially concerning for TWTR stock investors since management admitted last quarter that it needs to grow its share of ad budgets with those brand advertisers.
TWTR Already Has Many Advertisers
A survey from SocialFresh found that TWTR has eight times as many brand advertisers on its platform compared to Snapchat. Twitter says it has 130,000 active advertisers, but only a handful of those are big brands. Nonetheless, those brand advertisers make up the largest portion of the company’s ad revenue.
Twitter’s outlook for revenue growth isn’t great. Its Q2 outlook shows almost no revenue growth on a sequential basis, whereas most media companies can expect 3% to 5% revenue growth from Q1 to Q2.
During the company’s first-quarter earnings call, TWTR CFO Anthony Noto addressed concerns about the company’s slow revenue growth outlook:
“The penetration growth of those advertisers has largely run its course … and we’re focused on driving greater share of wallet. And so some of the slowdown that you see is a reflection of the fact that we’re moving from two dimensions of growth … to one dimension of growth.”
That’s what makes Snapchat such a substantial threat. Not only does it have more users than Twitter, but it also has yet to establish relationships with the vast majority of Twitter’s biggest advertisers.
Snapchat expects its revenue to grow from $59 million last year to $250 million to $350 million this year. The company has also set a bullish sales goal of $1 billion for 2017 and it expects revenue to reach at least $500 million. Those ad dollars have to come from somewhere, and they’ll cut directly into Twitter’s ability to grow its share of its advertiser’s wallets.
How Snapchat Will Attract More Advertisers
Snapchat has done an excellent job developing native advertising for its platforms. Its success with sponsored filters is a shining example of the unique potential for advertising on Snapchat.
While it costs advertisers considerably more to develop a Snapchat filter than it does to repurpose other digital content, there are few formats capable of generating brand awareness on the same viral level of a successful Snapchat filter.
On top of filters, Snapchat has more traditional video ads interspersed with its Live Stories and Discover feeds. What’s more, it’s developing an application program interface to allow advertisers to target its users with more precision based on age, gender, location and other factors. While it’s not the precise user data Twitter has access to, it’s enough for brand advertisers.
Most importantly, Snapchat is reportedly investing in expanding its direct sales team. It now has over 100 sales reps, up from just a handful last year when it first started advertising. The growth in its sales team will be instrumental in growing its base of active advertisers.
With Snapchat investing heavily in both the tech and sales side of its ad business, it’s not hard to see its revenue quadrupling or quintupling this year and then doubling or tripling next year as management indicated it could to its investors who recently piled in another $1.8 billion into the company.
TWTR’s revenue growth is expected to slow to just 22% this year. If Snapchat’s investments pay off, that growth could slow even more next year as Snapchat catches up.
As of this writing, Adam Levy did not hold a position in any of the aforementioned securities.