Nothing can go right for social media stocks these days. That is especially true for Snap (NYSE:SNAP). The teen-favorite social media app has had trouble growing its user base beyond its core demographic. Even within that core demographic, Snap has had trouble monetizing users with ads. When they do monetize users with ads, the users tend to hate it.
Overall, it hasn’t been a pretty showing for Snap or Snap stock. The company went public at $17 per share last year. Recently, Snap stock broke below $10. The pain didn’t stop there. Now, Snap stock is rapidly closing in on $9.
Is this a falling knife? Is Snap stock doomed to head lower thanks to user growth and monetization problems?
I don’t think so. The stock certainly looks like a falling knife right now. But the company has 200 million highly engaged users, and that in it of itself is extremely valuable. Granted, the company is having trouble monetizing those users. But, it is only a matter of time before Snap figures out monetization, and when that catalyst arrives and drives improved financials, Snap stock could soar.
I think that catalyst is already here.
Snap just announced a visual shopping partnership with Amazon (NASDAQ:AMZN) wherein consumers can simply point the Snapchat camera at any object, press a button and when Amazon recognizes that product, it will surface a link allowing users to buy that product. Snap calls this new feature Visual Search, and its implications are potentially huge.
Huge enough to be a game-changer for Snap stock.
Visual Search Could Be Huge for Snap Stock
There are two observations that underpin the idea that Snap’s new Visual Search could be huge. Those observations are:
- Commerce follows consumer engagement.
- Fast is best in today’s world.
Commerce always follows consumer engagement. When consumer engagement was strong in the brick-and-mortar channel, companies pumped millions and billions of dollars into building out physical footprints to turn that engagement into commerce. Then, consumer engagement shifted to the digital channel. Retailers followed suit, and e-commerce was born. Then, consumer engagement shifted to the mobile channel. Retailers followed suit, and e-commerce was born.
Thus, from a historical perspective, the trend is pretty clear. Commerce follows consumer engagement.
Right now, consumer engagement is strongest in visual-heavy, mobile-first social media apps like Instagram. That is why Instagram is building out multiple shopping features, while Snap is rolling out Visual Search with Amazon. If history serves as any indication, these initiatives will be hugely successful because both of these apps have strong engagement.
More importantly, fast is best in today’s world. We live in an impulse era of instant gratification. Shopping on Instagram and/or Snapchat fits that era perfectly. Suppose you are scrolling through your Instagram or Snapchat feed, and see some product you like. Today’s shoppers want to buy it immediately, and Instagram and Snapchat are allowing them do that.
Snap is actually taking it one step further. Visual Search allows users to take pictures of things in the real-world, and have that immediately lead to a digital transaction. That action is perhaps the quintessence of fast shopping, and as such, should be a huge hit among internet shoppers worldwide.
Snap Stock Looks Compelling
Visual Search is a big step toward Snap becoming a digital marketplace. If the company can successfully execute on this transition, then Snap will have multiple avenues to monetize its user base. That means Snap won’t be entirely reliant on ads to drive revenue, and consequently, won’t have to run as many ads. Instead, they can balance ad revenue with marketplace revenue, and keep engagement high by keeping ad volume low.
That is a winning strategy which should result in materially higher prices for Snap stock.
Granted, it all hinges on the notion that Snap can transform into a digital marketplace. But, I think that current trends speak favorably for that transformation. Thus, as this stock continues to drop on broad digital advertising concerns, I think the risk-reward on Snap stock becomes more compelling. Upside is potentially enormous if this company dramatically improves ad monetization rates and/or builds out robust commerce capabilities.
The likelihood that either of those happens is high, and as such, the likelihood of Snap stock rising from here is high, too.
Bottom Line on SNAP Stock
Snap isn’t the next Facebook (NASDAQ:FB). But, it is an extremely valuable digital ecosystem of 200 million deeply engaged users. So long as Snap can keep those users deeply engaged, Snap stock is undervalued below $10 considering its multiple monetization opportunities.
As of this writing, Luke Lango was long SNAP, AMZN and FB.
