Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Where Will Snap Be in 5 Years?

By Leo Sun - Jul 8, 2019 at 5:08PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The next few years will be critical for Snapchat’s survival.

Snap ( SNAP 2.42% ) has burned plenty of investors before. The Snapchat maker went public at $17 in March 2017, quickly soared to the high $20s, then slid to about $5 last December amid concerns about its slowing user growth, competition from Facebook's ( FB 3.60% ) Instagram, and lack of profitability.

However, Snap's stock rebounded to the mid-teens this year as its user growth stabilized, its average revenue per user (ARPU) improved, and its losses narrowed. Snap also expanded Snapchat's ecosystem with new features to boost its ARPU. Those improvements indicate that Instagram wouldn't render Snapchat obsolete anytime soon. But will Snapchat still survive and thrive over the next five years?

Two young women take a selfie.

Image source: Getty Images.

Snap's biggest challenges

Snap finished the first quarter with 190 million daily active users (DAUs), compared to 186 million in the fourth quarter and 191 million a year ago. That sequential stabilization indicates that its core users, most of whom belong to the coveted Gen Z demographic, aren't abandoning the platform.

41% of U.S. teens still call Snapchat their favorite social network, compared to 35% for Instagram, according to Piper Jaffray's latest "Taking Stock with Teens" survey. Furthermore, Snap consistently grew its ARPU by selling more automated ads at lower prices -- which offset its peaking user growth over the past year:


Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019













Data source: Snap quarterly reports.

In other words, Snap will keep prioritizing its revenue growth per user over its total user growth over the next few years. It will try to maintain that momentum by integrating more in-app games, original videos, augmented reality (AR) lenses, and other features to its ecosystem.

It's also expanding its ad network to third-party apps, making it easier for small businesses to launch ad campaigns through a partnership with Shopify, and it's encouraging developers to create more Snapchat features -- which will hopefully expand the app into a full-blown platform.

A young woman takes a selfie with a pineapple.

Image source: Getty Images.

A tough balancing act with unpredictable variables

However, it's still unclear if those new features can boost Snap's ARPU enough to offset its slowing user growth over the long term. eMarketer expects Snapchat's total monthly active users (MAUs) in the U.S. to decline 2.8% to 77.5 million this year, and only grow slightly to 28.1 million by 2023. The firm estimates that 39.9% of U.S. social media users used Snapchat last year, but that figure could drop to 37.9% this year, and 35.3% by 2023.

That decline can be attributed to tough competition from Instagram, which is expected to grow its U.S. MAUs 6.2% to 106.7 million this year. eMarketer also expects Instagram to add nearly 19 million new MAUs by 2023 -- which puts a lot of pressure on Snapchat to increase its revenue per user.

Snap reined in its spending over the past year, which narrowed its net loss from $386 million to $310 million between the first quarters of 2018 and 2019. Its negative free cash flow (FCF) of $78 million also improved significantly from a negative FCF of $268 million a year ago.

Snap finished last quarter with $246 million in cash and equivalents, but its negative FCF indicates that it could still run out of cash in the near future. This indicates that it needs to be cautious with its ecosystem expansion efforts and avoid wasteful projects like Spectacles in the future.

Trying to justify its premium valuation

Snap's stock trades at about 11 times this year's sales and 9 times next year's sales. Analysts expect its revenue to rise 35% this year and 31% next year, but its bottom line is expected to stay in the red.

Facebook trades at just 8 times this year's sales and 7 times next year's sales. Wall Street expects Facebook to generate revenue growth of just 24% this year and 21% next year -- but Facebook is also firmly profitable and trades at just 21 times forward earnings.

Facebook's growth is decelerating, but most investors believe the world's top social network will still exist in five years. Snap's outlook is hazier -- its business is stabilizing, but it will face more pressure to boost its ARPU and narrow its losses as its user growth tops out. Accomplishing that as it expands its ecosystem will be tough.

I think Snapchat will still be relevant in five years, since current Gen Z users won't simply stop using the app as they age. However, Snapchat isn't out of the woods yet, and it needs to prove that its new efforts -- which include targeting older users, expanding its walled garden, and attracting more developers -- can pay off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
$47.92 (2.42%) $1.13
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$317.87 (3.60%) $11.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.