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Is Giving Snap a Much-Needed Lifeline?

By Leo Sun - Updated Sep 27, 2018 at 4:00PM

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Will Snap and Amazon redefine “social shopping” while holding Instagram at bay?

Snap (SNAP 5.20%) and Amazon (AMZN 3.66%) recently revealed a new feature for Snapchat that lets users shop for products on Amazon. Users take a picture of a physical product or a barcode, Amazon displays the product (or similar products) on a pop-up card, and users who tap on a link are redirected to Amazon's app or website to complete their purchase.

Snap will test the feature for a small group of US users before considering a rollout in other markets. Will cozying up to Amazon finally move the needle for Snap, which shed nearly 40% of its market value over the past year?

Snapchat and Amazon's shopping tool.

Image source: Snap.

Why Snap needs Amazon

Snap's biggest problem is its slowing user growth. Snapchat's daily active users (DAUs) fell 2% sequentially to 188 million last quarter, marking its first-ever decline in DAUs.

Much of the slowdown can be attributed to intense competition from Facebook's (FB 1.83%) Instagram, which cloned most of Snapchat's trademark features -- including ephemeral messages, filters, and short video stories. Instagram Stories, which directly targets Snapchat, topped 400 million DAUs in June. Snap also remains unprofitable, and it reported a negative free cash flow of $234 million last quarter.

On the bright side, Snapchat remains the top social network for US teens according to eMarketer. The firm claims that 16.4% of US teens use Snapchat at least once per month, compared to 12.8% of teens on Instagram and 11.5% on Facebook.

Snap also continues to grow its average revenue per user (ARPU), which rose 34% annually and 16% sequentially to $1.40 last quarter, despite its slowdown in DAU growth. Snap attributes that growth to higher sales of programmatic ads. Snap is also exploring other ways -- like paid filters and interactive AR games -- to bolster its revenues per user.

That's why it makes sense for Snap to team up with Amazon. Snap didn't disclose the financial terms of the partnership, but if it gets a referral fee or cut of each Amazon purchase it could significantly boost its ARPU. However, Snap could also be offering its services for free to Amazon during the trial run.

Three girls pose for a selfie while shopping.

Image source: Getty Images.

The integration of Amazon's marketplace could also counter Instagram's recent moves into the social shopping market. Instagram already added shoppable links that led to checkout pages, launched a shopping channel in its Explore section, tested out a native payments platform, and is reportedly developing a stand-alone shopping app called IG Shopping. Pinterest is also dabbling in the market with its "Shop the Look" pins and Lens visual search tool, which is similar to Amazon and Snap's shopping camera.

Why Amazon might need Snap

Amazon remains the 800-pound gorilla in e-commerce, but it realizes that Facebook wants to leverage its position as the world's biggest social network to enter the e-commerce market.

Facebook tried to challenge Amazon before with local deals, in-app stores, gift purchases for friends, buy buttons, and Messenger chatbots -- but none of those efforts paid off. It's faring better with Instagram's fledgling e-commerce efforts, but most people probably still associate Instagram with filtered photos, and Amazon with online shopping.

But the lines between those markets can still be blurred. For example, Facebook Messenger's Chinese counterpart, Tencent's WeChat, successfully integrated e-commerce giant's marketplace directly into its messaging app via "mini programs".

Therefore, Amazon might consider its partnership with Snap to be a defensive move against Facebook and Instagram's e-commerce ambitions.

But will it move the needle for Snap?

The partnership between Snap and Amazon highlights some potential synergies between the two companies. If Amazon decides to pay Snap referral fees, it could give its revenues a much-needed boost.

But at this point we simply don't know enough about the deal to say if it could move the needle for Snap. Investors should also remember that Amazon dabbled in a similar experiment with shopping hashtags on Twitter four years ago. That partnership didn't turn Twitter into a social shopping network -- so investors should take the latest news about Snap and Amazon's partnership with a grain of salt.

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