Despite the fact that Snap (NYSE:SNAP) went public just a few short months ago, its business is still remarkably young and immature. The company decided to go public before it had built a stable advertising business. It only started testing out automated ad sales last October, paving the way for Snapchat Ad Manager, which went live earlier this week.
Ad Manager is an important step in scaling the ad business, since it opens up the ad platform to smaller advertisers that don't require as much personal attention. It goes without saying that the rollout didn't affect how Snap fared in the first quarter. Investors already saw the earnings results, but now there's a new gloomy point: Just 7% of marketers advertised on Snapchat in the first quarter.
That data point comes from a Social Media Examiner survey (via Business Insider), which had a sample size of roughly 5,700 marketers (two-thirds of which are business-to-consumer). In contrast, a whopping 94% of marketers had advertised on Facebook (NASDAQ:FB) during the first quarter, followed by 68% on Twitter. Facebook's Instagram grabbed 54% of marketers. Now, there are a couple of angles you can take when looking at Snap's 7%, since we don't have the luxury of longer-term trends (yet).
If you're optimistic or bullish on Snap, that low figure could potentially represent immense opportunity, as Snap has a lot of room to grow if it can just attract more advertisers to its nascent platform. You could also argue that the 7% figure is artificially low, since a third of the survey's respondents were business-to-business (B2B) marketers, and Snapchat isn't really a B2B ad platform like Microsoft's LinkedIn.
On the other hand, if you're a skeptical bear (like myself), it could potentially suggest that marketers simply aren't all that interested in Snapchat, or that Snapchat remains a niche ad platform. It's common knowledge that Snapchat is hugely popular among younger demographics, which are as a group a notoriously difficult audience to reach effectively. Advertisers certainly want to reach these users, but it might be more worthwhile to invest their ad dollars in a more mainstream platform like Facebook. Broadening the appeal is no easy task, and Snapchat may struggle to grow that 7%, particularly since Snapchat is still widely seen by advertisers as an experimental ad platform.
Where does Snap go from here?
The backdrop is that Facebook continues to relentlessly copy Snapchat's most popular features, threatening to steal users away (there's evidence that it's succeeding), which incrementally hinders the appeal to advertisers. If Snapchat's daily active user (DAU) figures start heading the wrong way at the same time that it's trying to convince more and more advertisers to test out its ad platform, that could be a tough sell.
Let's see how many marketers try advertising on Snapchat in the second quarter.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook and TWTR. The Motley Fool has a disclosure policy.