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Can a Snap Store Keep the Rebound Going?

By Rich Duprey - Feb 20, 2018 at 9:05PM

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Only if it vastly expands its purpose.

Snap (SNAP 5.45%) may have posted surprisingly strong results for the fourth quarter, with higher revenues and more daily average users. But does the idea of the Snapchat parent selling plush toys and T-shirts make you want to buy its merch -- and its stock -- or does it have you dropping that 10-foot pole you were holding onto and running even farther away?

Snapping a streak

There's a lot to like in Snap's Q4 report, but one quarter doesn't make a trend. The company needs to build on it, and at first glance, it doesn't look like its new app store will help it do that. Instead, it appears to be another ineffectual gesture the company has been making as it casts about for an identity. But if you dig a little deeper, there really may be something for investors to appreciate.

Person wearing Snap Goggles

Image source: Snap.

Currently, there's not much for sale in the Snap Store, located in the Discover section of the app, which usually features curated content from select publishers. For a limited time, you can buy things like a Dancing Hot Dog plush doll, a Winkface sweatshirt, or a Dog Lens T-shirt, ranging in price from around $20 to $50. More products, we are told, will be coming soon.

You might be wondering: What is the company trying to accomplish with this? After all, Snap itself says it isn't trying to make money with this effort (a good thing), and its results have been hit-or-miss with endeavors like its Spectacle camera glasses and various augmented reality lenses. And its platform redesign fell flat with critics, though it may have helped attract new users. This assortment of tchotchkes looks like another misfire.

A quick U-turn

Snap's user numbers aren't in decline, but their growth is no longer as robust as it used to be. Daily active users topped out at 187 million this quarter, up 18% year over year, but a far cry from the 48% growth it notched in the same quarter a year ago. However, it was the first time since early 2016 that its growth rate was higher than in the previous quarter. Revenues spiked higher, too.

So an investor would rightly wonder why Snap was wasting its time on something that wasn't going to have an impact on the areas that could make a difference in its turnaround.

The fact is, the Snap Store actually may do that. At least, that's the goal. By creating an outlet that allows it to engage its users more directly, it can drive brand loyalty. It also creates an opportunity to eventually sell other items, whether of its own design or from third-party sellers, which could encourage publishers to continue developing content for Snapchat, particularly if that helps them to monetize their own user engagement.

That would seem an opportune move in the wake of Facebook's (META 7.19%) decision to de-emphasize publishers' content in user feeds in favor of that from people's family and friends. That hasn't gone over well with content producers: Half of its Instant Article publishers have reportedly abandoned the site. A digital venue where they're able to benefit jointly with a platform may well resonate with them.

Far too often, Facebook has run roughshod over Snap, updating its Instagram and WhatsApp apps to steal the best parts of Snapchat. Essentially, it's been leveraging its size to do Snap better than Snap. This could give Snap a chance to turn the tables.

Snap Daily Active User growth

Data source: Snap quarterly SEC filings. Chart by author.

Snap needs to prove itself

The problem is the bull case rests on the word "could." There's no guarantee Snap is actually going to move in this direction. Right now -- and for the foreseeable future -- the Snap Store is simply a channel that will let teens buy a Bring Back Best Friends sweatshirt for $50. The number of people who are actually going to purchase any of these novelties is probably pretty low, which means it could be a hard sell to convince outsiders to put their own goods up for sale.

If the Snap Store helps the company sell more Spectacles, that could be beneficial -- assuming it offers them there. In the past, it sold the camera glasses from vending machines, and last year, it began opening pop-up stores to sell them. Those are more expensive methods than fulfilling orders through the app, so a shift in that direction could help drive both revenues and profits.

While Snap's surprisingly strong quarter might momentarily quiet its critics, investors will need to watch to learn which direction it heads with the Snap Store. The question is whether it will transform into something worthwhile -- and if it does, how quickly. If it lives up to its potential, it could become something that helps the company build on the momentum of this latest positive quarter -- and make it easier to invest in Snap stock without having to hold your nose.

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