5 Ways Snap Is Locking in Its Users

Snap's (SNAP -2.72%) stock dipped below $5 a share near the end of 2018 due to a pervasive belief that Snapchat's user growth had peaked and that the company's losses were unsustainable. The bears claimed that Facebook's (META -0.52%) Instagram would render it obsolete and that its fickle base of teen users would eventually abandon the app.

Yet Snap's stock rebounded roughly 170% this year as it gained users again, narrowed its losses, and consistently grew its average revenue per user (ARPU). Snap largely attributed that stabilization to its self-serve ads and a redesign of its Android app, but the company is also locking in its users with five key strategies. Let's take a closer look:

Image source: Getty Images.

1. Augmented reality

During last quarter's conference call, Snap CEO Evan Spiegel declared that Snap had "a significant lead in augmented reality," thanks to "the camera-first nature of Snapchat and the frequent usage of our camera." Spiegel also claimed that "smartphone-based augmented reality will be an important driver of our business over the coming years."

Spiegel claims that each of Snapchat's 210 million daily active users (DAUs) interacts with its AR features "nearly 30 times every day" on average. These features include AR lenses, games, and experiences that are distributed through its AR Bar and Scan tool. Snapchat's community has already created over 600,000 lenses in Lens Studio, and it claims that top community lenses are hitting "billions of views." 

2. Expanded social map platform

Snap acquired Zenly, a social mapping start-up, two years ago. That acquisition led to the launch of Snap Map, which lets users find each other based on their real-life locations, posts, and videos. It also allows users to quickly identify local news trends.

Snap started testing out Bitmoji check-ins earlier this year, as well as other ways to gamify the platform. In July, Spiegel stated that Snap was "super excited with the engagement" it was seeing on its mapping platform, but noted that it would focus on improving the product experience instead of monetizing the platform.

3. A new gaming platform

Snap launched its in-app gaming platform, Snap Games, earlier this year. The platform has already secured several publishers, including Zynga (ZNGA), which launched the battle royale game Tiny Royale in June.

Snap hasn't disclosed any exact user numbers for its games yet, but Spiegel claimed that the platform was "off to a great start" in July, and that the company saw a "direct correlation between the number of friends playing a game together and their time spent playing games."

Last quarter, Spiegel declared that Snapchat had "barely scratched the surface of the opportunity" with Snap Games and Snap Map and that the company would "enhance, scale and monetize" both platforms over the next three to five years.

Image source: Getty Images.

4. Original videos

Snap launched Snap Originals, a batch of original vertical video series with five-minute episodes, in late 2018. It added two to three unskippable six-second ads per episode, which enabled it to insert more ads per minute than other platforms with longer-form videos.

The addition of Original videos to its Discover tab significantly boosted its video viewership. Last quarter, Snap stated that over 10 million viewers were watching its expanding network of over 100 Discover channels, and total time spent watching Discover content rose 40% year-over-year. That growth is likely keeping viewers away from Facebook's IGTV for Instagram, which has struggled to stand out in the crowded video market. 

5. Spectacles

Snap hasn't sold many Spectacles so far, but it continues to launch new versions of its AR glasses in limited batches to establish a foothold in this nascent market. Its latest version, Spectacles 3, uses dual cameras to perceive depth and provide more accurate AR overlays on real-world objects -- which complements its long-term plans for its AR, gaming, and mapping platforms.

Snap probably won't generate any meaningful revenue from Spectacles in the near future, but its long-term vision is arguably more coherent than Facebook's broader plan for its Stella and Orion AR glasses. Mainstream users might also prefer Snap's Spectacles over Facebook's upcoming devices since the company hasn't been plagued with the same privacy and security issues as Facebook.

The numbers don't lie

I've had my doubts about Snap's survival, but its growth in DAUs and ARPU remains robust, and the management has a clear vision for the future.

Source: Snap quarterly reports.

Snap's turnaround inspired me to start building a position in the stock over the past four months. It still faces tough competition in the social networking market, but the ongoing expansion of its ecosystem should lock in more users and widen its moat.