Snap's (SNAP -1.97%) Snapchat is one of the top social media platforms for U.S. teens. According to Piper Jaffray's fall survey of teen interests, 81% of teens regularly use the app, while Facebook's (META -0.33%) Instagram ranked first with an 85% share.

However, ByteDance's short video app TikTok is becoming a major threat to both Snapchat and Instagram. TikTok topped 500 million monthly active users (MAUs) in mid-2018, and was the world's fourth-most downloaded app in 2019, according to App Annie. Instagram and Snapchat ranked fifth and eighth, respectively.

A young woman listens to music on her phone.

Image source: Getty Images.

TikTok's meteoric rise should alarm Snap, but CEO Evan Spiegel surprisingly referred to TikTok as a "friend" and a major advertising partner during a conference call last October. Spiegel didn't mention TikTok at all last quarter, but a recent MediaRadar report claimed that TikTok was actually Snap's largest advertiser in 2019.

TikTok accounted for 4.4% of Snap's annual ad revenue, putting it ahead of other top clients like Coca-Cola, Comcast, and Disney -- which all accounted for less than 4% of its ad revenue. Should Snap investors be concerned about TikTok's aggressive ad purchases on Snapchat?

TikTok is evolving into a Snapchat rival

At first glance, TikTok and Snapchat are different types of apps. TikTok lets users create and share short musical videos, while Snap lets users send vanishing messages. But there are also overlapping features.

A young woman takes a selfie.

Image source: Getty Images.

Like Snapchat, TikTok lets users send direct messages to their friends and add filters to videos. Like TikTok, Snapchat encourages users to watch short videos on its Discover tab and share user-created videos on its real-time Snapchat Map.

Both apps target fickle Gen Z users, many of whom view the platforms as safe havens from their parents on Facebook and Instagram. That's why TikTok is flooding Snapchat with ads featuring its short videos.

ByteDance, which is based in Beijing, clearly has grand ambitions of becoming a major social media company. Last year, it hired Vanessa Pappas, the former global head of creative insights at Alphabet's YouTube, as TikTok's first general manager in the U.S., and Blake Chandlee, Facebook's VP of global partnerships, as TikTok's head of strategic partnerships. It also poached over a dozen employees from Snap.

ByteDance also integrates logins from Snapchat, Facebook, Instagram, Twitter, and other platforms directly into TikTok. That integration reduces the friction between the platforms and helps TikTok lock in more users.

With friends like these...

Those moves indicate that Snapchat shouldn't consider TikTok to be a friend. In fact, Facebook and Tencent (TCEHY -2.49%) both consider it to be a major threat. Both companies launched TikTok clones -- including Facebook's Lasso and Tencent's Hotpot Video -- but those late arrivals couldn't curb TikTok's growth.

On the bright side, TikTok's ad blitz hasn't hurt Snap's ability to gain more daily active users (DAUs), which hit 218 million last quarter and marked sequential and annual accelerations from the third quarter:

DAU growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019













Source: Snap quarterly reports.

Those growth rates, which coincide with TikTok's growth, suggest that there's a big overlap in Snap and TikTok users. Moreover, Snapchat and TikTok have both weathered an onslaught of clones from bigger companies without losing their core users -- which indicates that both apps enjoy first mover's advantages in their respective markets.

Snap is also becoming less dependent on the North American market, which posted slower growth than Europe and the rest of the world last quarter, as TikTok courts more American users. In other words, there could be plenty of room for both apps to thrive without trampling each other.

The bottom line

As a Snap investor, I consider TikTok's aggressive purchases of ads on Snapchat to be a vote of confidence for the platform instead of a disruptive threat. ByteDance clearly sees Snapchat as a market leader in the Gen Z space, and it wants to share those users.

There's no real evidence that teen users are abandoning one platform for the other. If there is, I'd reconsider my thesis on Snap. But for now, I believe both apps will benefit from the rising spending power of Gen Z users and their robust interest in short videos.