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Snap's Future Can Be Read in These 3 Key Metrics

By Prosper Junior Bakiny - Jan 29, 2020 at 9:12AM

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If you're wondering whether the social media company's comeback will continue, watch these stats in its upcoming quarterly report.

In 2019, Snap Inc. (SNAP 0.26%), the company behind the popular app Snapchat, had its best year yet in its three-year history a publicly traded company. The social media player's shares soared by 196.4%, and the gains don't seem to be slowing down either -- shares were already up by about 11% this year on Monday. For context, the S&P 500 is barely above flat so far in 2020.

Obviously, it is still far too early to tell whether Snap shares will reprise last year's performance, but the company's fourth-quarter and full-year financial results -- which are set to be released on Feb. 4 -- will provide the first clear indications. When that report comes out, investors will want to pay close attention to three key metrics: user growth, monetization, and user engagement.

A person watching shows on his cell phone

Image Source: Getty Images.

The keys to Snap's comeback 

Snap's user growth was unimpressive in 2017 and plateaued in 2018. During the fourth quarter of its fiscal 2018, the company reported 186 million daily active users (DAUs), compared to 187 million DAUs a year prior.  Those lackluster results were likely due to several factors, including an unpopular redesign of Snapchat.

However, Snap withdrew some of Snapchat's redesigns and eventually rolled out yet another rebuild of its popular app. Snap's user growth took off as a result, and by the third quarter of 2019, the company had 210 million DAUs, 13% higher than during Q4 2018. 

If that growth rate doesn't seem particularly impressive, consider that Snap's DAUs had peaked at 191 million during Q1 2018,  only to drop back down to 186 million in Q4 2018. The shift indicates a renewed interest in its app. Naturally, if the tech company is to keep its share price momentum going, it must continue to increase its DAUs. 

The number of users on Snapchat isn't everything, however. User engagement is important as well, and in this department, the company has also been improving, particularly via its Discover feature. Snap began streaming a series of shows -- dubbed Snap Originals -- on its Discover platform in May, and the response has been very encouraging so far.

During the second quarter, the total time spent on Discover by Snapchat's users increased by 60% year over year, and Snapchat's Discover audience grew by 35%. 

Discover's momentum continued during the third quarter, with the total daily time spent by Snapchat users watching Discover increasing by 40% year over year.  It will be interesting to find out how Snap's Discover feature, and its Snap Originals, performed during the fourth quarter.

Lastly, Snap has done a better job of monetizing its users. During the first, second, and third quarters, its average revenue per user increased year over year by 39%, 37%, and 33%, respectively. To keep impressing Wall Street, Snap will have to maintain a similar trajectory on that score.

Still a long road ahead

So far, Snap's comeback has only managed to lift the company's share price barely above its $17 IPO levels. Snap's shares are worth $18.58 apiece (at writing) and with the company trading at more than 600 times future earnings -- Snap isn't a bargain, to say the least. While rich valuation metrics are typical of growth stocks, Snap's price to earnings (PE) ratio is off the chart even for a growth stock. Further, Snap still has to deal with stiff competition, particularly from Facebook's (FB 1.18%) Instagram.

Instagram -- which famously copied Snap's stories format back in 2016 and already has over 500 million DAUs -- now generates about 10% of Facebook's ad revenue. For context, Facebook generated $17.4 billion in ad revenue during the third quarter, which means Instagram stories made about $1.7 billion in revenue during the quarter, handily outperforming Snap and its $446 million third-quarter revenue. This competitive pressure will likely continue to be a thorn in Snap's side.

The key takeaway for investors

While last year was an excellent one for Snap shareholders, the company now needs to show that it wasn't merely a fluke and that it can keep improving its user growth, engagement, and monetization. Snap also needs to do so while dealing with the competition from rival platforms such as Instagram. Those are the ingredients that would allow it to deliver increasingly strong financial performance.

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Stocks Mentioned

Snap Inc. Stock Quote
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$23.26 (0.26%) $0.06
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