Snap (NYSE:SNAP) has made a conscious decision to ignore emerging markets so that it can focus on developed ones like the U.S. and Europe. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, look at why Snap may not have much of a choice.
A full transcript follows the video.
This video was recorded on May 12, 2017.
Dylan Lewis: Something else to keep an eye on with what's going on with user growth is, all of it's coming from North America and Europe. You look at the company's rest of world segment -- those are the three ways they break it out right now -- and that's been relatively flat over the last three quarters. It's like 39 million, 39 million, 40 million. I think some of that is connectivity. Obviously, developing parts of the world don't necessarily have access to the same broadband cell service. And, obviously, Snap is a very visual and data-heavy app. But, I think that's problematic long-term for the company.
Evan Niu: Yeah. I think that's a conscious decision on their part, because they're only focused on the U.S. and Europe. There's been all of these headlines you've probably seen about, Evan Spiegel called India as being a poor country, and doesn't want to expand into it. Of course, that didn't go over very well with users in those countries. But, the underlying business rationale for why you might not want to expand in those countries is, ad monetization in those countries is very low. It is, financially, very hard to make money there. But, of course, saying the country is poor is a horrible way to go about it. But, if you look at their business, they don't really scale well to emerging markets because of their use of third-party cloud infrastructure, which we'll touch on in a minute. Their costs are very high, and the monetization is very low. So, if they were to expand into emerging markets, it accelerates their losses, because they get pinched by really poor ad rates and really high costs. So, financially, they don't really have that much of a choice, because they would bleed out a ton of money if they tried.
Lewis: Yeah. I guess I would argue that they're still in the phase of business where it's OK to be creating losses, because if you're building the daily active user base, people are going to ignore that for a long time. If you can get into some of these emerging markets and really be rooted there, you're putting yourself in a better long-term position. Whereas, right now, Facebook is eating their lunch in a lot of these developing markets, and they're just dropping a lot of features that Snap has in its app that they really developed and popularized. I think by the time Snap gets to some of those markets, people are going to be like, "I can already do this on Messenger or Instagram."
Niu: Yeah, I definitely think it's a short-sighted thing, to ignore these emerging markets.
Dylan Lewis owns shares of FB. Evan Niu, CFA owns shares of FB. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.