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Things Will Only Get Harder From Here On Out for Snap

By Prosper Junior Bakiny – Feb 11, 2020 at 9:14AM

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An increasingly competitive landscape could derail Snap's comeback story.

After struggling mightily during its first two years (or so) as a publicly traded company, Snap (SNAP -6.73%) -- the tech company behind the popular app Snapchat -- performed well last year. Its shares grew by 196%, on the back of a strong financial performance and robust user growth throughout the year.

However, Snap now has to prove that it can sustain this momentum. And while its fourth-quarter and full-year financial results were a step in the right direction, things aren't going to get any easier.

Snap's fourth-quarter results

There was much to admire about Snap's fourth-quarter results. The company's number of daily active users (DAUs) increased across all geographic regions, reaching 218 million by the end of the quarter, a 17% year-over-year increase. Furthermore, Snapchat's Discover feature continues to make serious headway. Last year the company released a slate of shows called Snap Originals on the Discover tab to increase user engagement, and the strategy seems to be working.

A family takes a group selfie from overhead.

Image source: Getty Images.

During the fourth-quarter earnings conference call Snap CEO Evan Spiegel, said: "We have dramatically expanded our product and content offerings through partnerships, including our Snap Original shows. While our investments up to this point have been selective and measured, these original shows are already being watched by more than half of the U.S. Gen Z population." Also, the amount of time spent by Snapchat's users on Discover increased by 35%, and more than 50 shows on Discover reached a monthly audience of over 10 million.

The company's ad business is improving as well, with its revenue from commercials more than tripling year over year and revenue from Story ads doubling during the quarter. However, not everything was perfect for Snap. Total revenue of $561 million fell short of analyst estimates, although it amounted to growth of 44% compared to the prior-year quarter.

Snap's revenue miss seems to have been the main catalyst behind the company's shares dropping after its earnings release, but that's probably an overreaction. Overall, the financial results were strong, and the post-earnings sell-off may represent an opportunity for investors. But before you rush to buy shares, remember that Snap's competitive landscape won't get easier anytime soon.

Competition is intensifying

We know that Facebook's (META -6.79%) Instagram is one of Snapchat's top competitors, with its Stories feature -- which it famously copied from Snapchat -- boasting over 500 million DAUs and accounting for around 10% of Facebook's total revenue.  But Snap has other competitors to worry about, too.

In early April, a new platform called Quibi will make its entrance. Quibi -- which will be a paid service -- will offer short-video series, and many of the confirmed shows on the platform will feature A-list celebrities, which could be a significant selling point. Note that Quibi had already secured $100 million in ad sales by June of last year, nine months before its official launch date.

While Snapchat could coexist with both Instagram and Quibi, stiff competition won't make Snap's progress any easier.

Not a cheap stock

Before purchasing shares of Snap, note the company's valuation. Snap is currently trading at 60 times future earnings, while its ratio of price-to-earnings to growth (PEG) is 12; clearly, this isn't a cheap tech stock. However, given that Snapchat seems to be maintaining its momentum and continues to grow its user base and engagement, the company may be worth the premium.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

Stocks Mentioned

Snap Stock Quote
Snap
SNAP
$9.42 (-6.73%) $0.68
Meta Platforms Stock Quote
Meta Platforms
META
$114.12 (-6.79%) $-8.31

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

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