3 Questions for Snap Investors to Consider

What investors need to think about before they jump into the stock after its fourth-quarter surprise.

Adam Levy
Adam Levy
Feb 14, 2019 at 9:00AM
Technology and Telecom

Snap (NYSE:SNAP) reported some promising results for the fourth quarter. Revenue came in above expectations and user losses finally subsided.

But the market's jubilation in response may be overdone. There are three big questions investors should consider, according to Guggenheim Securities' Michael Morris:

  1. Is the threat of Instagram too big to overcome?
  2. Will the reworked Android app spur overseas growth?
  3. Can Snap generate additional demand from advertisers?

Let's take a closer look at Morris' three questions for Snap investors, and see what the future may hold for the stock.

Snapchat logo.

Image source: Snap.

Instagram and its 500 million daily users

When Snap first filed its IPO registration statement, the impact of Instagram Stories was quite evident. User growth fell off a cliff, and that's only been exacerbated over the past year following the Snapchat redesign.

While Snapchat has sat idle around 186 million daily active users for the past year, Instagram Stories has ballooned to 500 million, according to Facebook (NASDAQ:FB) management. That's up from 150 million around the time of Snap's IPO about two years ago.

Not to mention Facebook has hundreds of millions of people using its other Stories products, WhatsApp Status and Facebook Stories. Overall, the company says more than 1 billion people use its Stories products every day.

Check out the latest Snap earnings call transcript.

Facebook's big advantage over Snap, with regard to attracting new users, is that its apps are already installed on everyone's phones. Facebook can simply funnel users to its Stories products, and it's been doing an excellent job so far.

Metric

Facebook

Instagram

WhatsApp

Messenger

Monthly users

2.3 billion

1 billion

1.5 billion

1.3 billion

Data source: Facebook

It'll be hard for Snap to overcome that advantage.

Relaunching on Android

Snap spent 2018 completely rebuilding its Android app, which has lagged in performance compared to its iOS app. Android is more difficult to design for since Android phone specifications vary so widely compared to iPhones. The company's new rebuilt app loads 20% faster than before and it recently started rolling it out to select users.

"There's roughly 2 billion or so, maybe more 2 billion who are on Android and don't have Snapchat," CEO Evan Spiegel said on Snap's fourth-quarter earnings call. "So if we can take a few percent market share there, it'd make a real difference to our user base."

The discrepancy in the quality of the app experience between iOS and Android is evident in the installed base. About one-third of iOS users have Snapchat installed on their phones, according to Morris. The percentage is in the single digits for Android users.

The challenge for Snap is that many Android users have tried the old laggy version of Snapchat and been disappointed. Those users may have opted for one of Facebook's products and told their friends about their experience as well. Snap will have to overcome users' past experiences and impressions of its Android app.


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Getting advertisers on board

Snap launched its self-service ad tools in the second quarter of 2017, and management says its seen the number of active advertisers grow in every quarter since. Increasing the number of advertisers on the platform is essential when ads are sold via auction, as more bidders drive higher ad prices.

Snap's ability to drive continued growth in active ad accounts will rely on its return on investment for marketers. Snap has historically offered relatively low ROI compared to Facebook despite significantly lower average ad prices.

The company recently introduced new ad products like non-skippable commercials that provide greater value to advertisers. The new products helped drive ad prices higher sequentially in the fourth quarter.

Snap is certainly growing advertisers, but it's doing so off a small base. Just 28% of U.S. marketers use Snapchat, according to an estimate from eMarketer. The percentage actually paying for ad placements is likely lower. By comparison, 69% of marketers use Instagram and 86% use Facebook. And Facebook just announced it has 7 million active advertisers, up 1 million from November 2017.

As Snap's advertiser base gets bigger, it's not clear it can sustain active advertiser growth without producing significant improvements in ROI for advertisers. If Snap's ability to grow its user base is compromised by Facebook's efforts in Stories or its past missteps with its Android app, advertisers will be even less attracted to Snapchat. Investors should consider these questions and how the answers impact Snap's user growth and advertiser growth over the long term before jumping on the bandwagon of jubilation for its most recent results.