A lot of analysts got it wrong about Snap (NYSE:SNAP) stock. In late 2018, Snapchat stock was in a tailspin. The prevailing sentiment was that the tech startup was about to be another cautionary tale regarding initial public offerings. What happened then has been nothing short of amazing. SNAP stock has grown nearly 200% in 2019, largely fueled by increasing quarterly revenue.
Now, nearly a year later, the SNAP stock price is once again at a turning point. Only now, instead of wondering if Snap is a falling knife, investors wonder if shares have room to grow.
But for Snap to see their stock price grow, it will need to generate more advertising revenue. With a growing user base among a desirable demographic, that sounds easy enough. However, this demographic is anything but traditional when it comes to advertising. That’s a reason I think it’s best to proceed with caution.
Snap Has a Growing User Base
The bullish case for Snap stock points to 13 million daily active users. That’s how many active users the company added in the second quarter. This growth gave analysts a lift after a disappointing first quarter that saw Snap add just four million users.
Snap’s monthly user base is just above 500 million. That’s more than Twitter (NYSE:TWTR) (335 million users) but still far fewer than Facebook (NASDAQ:FB) (2.4 billion). Snap has also flown under the radar while companies like Facebook and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) draw increased regulatory scrutiny.
Snap’s CEO Evan Spiegel commented, “Completing these transitions has established a strong foundation for growing our community, increasing engagement and growing advertising demand.”
Growing Ad Demand Is Easier Said than Done
Snap has been built for, and targeted to millennials and Generation Z. These generations got social media education in middle school.
The attraction of Snapchat was the idea of being able to self-produce shareable content that only stays online for a short period of time. Many reject Facebook because their content stays online unless the user deletes it.
Despite interacting with multiple social media channels in one day, these generations are intensely concerned about their privacy. Providing what they see as personal information is one reason why email advertising is a non-starter with this demographic.
Traditional Advertising Won’t Work
As it relates to ads, these generations want to be entertained, not sold. These target audiences will not engage passively with “traditional” advertising.
A recent report titled The Everything Guide to Generation Z by Vision Critical, in partnership with research firm MARU/VCR&C, provides insights into the attitudes, behaviors and value of this generation.
One of the key takeaways as it relates to Snap is that 69% of Generation Z finds ads disruptive. While the word “disruptive” can be thrown around by marketers in a good way (i.e., it changes the conventional way of thinking, forcing consumers to pay attention) that is not the context here. This generation, more so than even millennials, want ads to meet them where they are in a very organic manner.
Yet, Erin Gade of Yes Lifestyle Marketing reported that one in five Generation Z consumers found Snapchat influential in their purchase decision. This requires a cross-channel model that is far different from banner ads and pop-up videos. In fact, in many cases the ads aren’t ads at all.
As someone who’s worked in marketing agencies, I can confirm that many marketers are not open to new approaches. They want traditional “push” advertising and pre-roll messages because they’re measurable. But they frequently don’t look at or understand the metrics that matter. It’s a soft-sell approach. The payoff is more intrinsic and less measurable.
Snap Needs Ad Revenue to Reach Profitability
The fact that Snap is not yet profitable is not a big deal for investors. The company is not expected to be profitable until 2023. However, that revenue growth is largely going to be dependent on the company’s ability to monetize their advertising. InvestorPlace contributor Vince Martin wrote in August that Snap would require at least $1 billion in additional revenue to support its current valuation. The stock is already down about 10% from its recent highs. I expect that some investors will look to engage in profit taking as the year comes to an end.
The argument for Snap stock is that their target audience is devoted to technology and loyally uses the app. But this is not a captive audience and they can’t be marketed to as such.
Growing their user base is not enough for Snap stock. For the company to really grow, they have to find a way to monetize that base. I’m not saying it can’t be done; I’m just skeptical.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.