Why I Like Snapchat as a Company More than Snapchat Stock

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Snap (NYSE:SNAP) reported earnings on Oct. 22. Revenue came in at $446 million, better than the consensus analysts’ forecast for $435.1 million. SNAP is not yet profitable but posted a smaller than expected loss of 4 cents per share (analysts were projecting 5 cents).

Unfortunately for Snapchat stock, young people mature.
Source: Christopher Penler / Shutterstock.com

Analysts were less encouraged by Snap’s forward revenue guidance. The company is projecting fourth-quarter revenue guidance to come in between $540 million to $560 million. If revenue comes in at the midpoint, it would be less than the analysts’ projections of $555.4 million. However, it would still be a 41% year-over-year gain.

The company also did well on site-performance metrics with global daily active users (DAUs) coming in at 210 million, three million above forecast. Average revenue per user was also ahead of forecast ($2.12 as opposed to $2.10).

As I see it, the strength and the weakness of Snapchat — and the risk to Snapchat stock — are essentially the same thing. The company has a user base that will eventually age out of the app or cause the app to reinvent itself in unknown ways.

Snap Has a Devoted Core User Base

I don’t Snapchat with anyone. It’s one of the few major social media outlets that I can say I don’t use without feeling out of the loop. According to the digital marketing agency Omincore, 73% of Snapchat users in the United States are in the 18-24 year old demographic. Here are some other insights from the Omnicore survey:

  • 75% of all global Snapchat users are under the age of 35.
  • 69% of U.S. teens say they use Snapchat and 41% of U.S. teens say Snapchat is their preferred social media platform.
  • Users under the age of 25 use Snapchat for an average of 40 minutes per day, more than they use Instagram.
  • 20% of college students use Snapchat. Anecdotally, I have it on good authority (I have two college students) that this percentage is significantly higher.

One of the reasons Snapchat became so popular with teenagers is because it creates the illusion of being more private. “Snaps” as they’re called disappear after a certain period of time unless the user saves them. This applies to direct messages (DMs) that are another popular feature of the app.

That’s the good news. The (potentially) bad news for SNAP is that those numbers haven’t changed much since 2016. For a company that is looking for ways to monetize its user base, this can be challenging.

SNAP Needs to Monetize Its User Base

Like other social media platforms, Snap relies on advertising for a significant portion of its revenue. But that only gets them so far. They also make money from in-app purchases.

One of the problems they are having is determining how people actually use the app. In fact, messaging and chatting remain, by far, the two most commonly used features of the app. Those features, however, do not lend themselves to monetization.

Snapchat’s User Base Is Starting to Skew Older

I’m not Snap’s target audience. Or am I? An interesting statistic is that more than half of Snapchat’s new users are over the age of 25. And this is where I start having some real problems with SNAP stock.

Around 30% of teenagers say they use Snap specifically because their parents do not. That has to be considered as prime Snap users’ age. Will they stop using the platform? If they continue to use the platform, how will the platform have to evolve to capture disposable dollars in a similar way that filters do today?

And even if these users stop using the platform, when it comes to technology the question is always, what’s next?

While Snap’s number of global DAUs was up, at least one analyst is concerned about user growth, particularly in North America. Rohit Kulkarni of MKM Partners said, “North American DAUs came in below our expectations…This raises the concerns around sustainability and lumpiness in Snap’s user growth, particularly amidst rising competition from TikTok and Instagram.” Kulkarni gives SNAP stock a neutral rating with a $16 price target.

What’s Next for Snapchat Stock?

After the earnings report, SNAP stock price plunged to around $13 per share but has since made a recovery and is now just about 10% its 2019 high. It’s fair to ask when, or if, the Snap stock price will ever be able to reach its initial public offering levels of around $27 per share. And if you’re looking to be a long-term investor in Snap, the real question is, where’s the ceiling?

The company has a demographic problem. If they maintain their current user base, there will be limited utility of the app beyond what it does today. But “aging up” brings with it additional challenges as the same users that like to use it now won’t like to use the same app that their parents use. And all of this is happening in a tech environment where new threats like TikTok are popping up, and ongoing threats like Facebook’s (NASDAQ:FB) Instagram are closing fast.

What I like about the SNAP business model is that the company knows who its core users are and should be able to continue to get eyeballs on the app. What I don’t like about SNAP stock is that user base will only stay loyal until the next big thing rolls around, or until Snap no longer seems cool.

As of this writing Chris Markoch did not hold a position in any of the aforementioned securities.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/snapchat-stock-growth-needs-strong-base/.

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