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The Real Growth Story at Snap

By Adam Levy – Jun 24, 2020 at 10:15AM

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This metric is ultimately more important than user growth.

Since its IPO in 2017, Snap (SNAP -1.34%) has mostly disappointed investors with its user growth. While it has posted strong user growth results in recent quarters, it had to reset expectations early in its life as a publicly traded company, including a dismal 2018, which saw it lose 1 million daily active users after a botched Snapchat redesign.

User growth has consistently accelerated from its nadir in 2018, reaching 20% in the first quarter. While investors have cheered management's ability to turn its user growth around, the real growth story at Snap remains its potential to monetize users.

Snapchat's never going to be as big as Facebook (META -1.69%), but the amount of revenue it makes per user has a lot of room to climb.

The Snapchat logo on a yellow background.

Image source: Snap.

One-tenth the size doesn't mean one-tenth the revenue per user

Facebook generated $143.41 per user in the United States and Canada over the trailing 12 months. While that combines revenue across properties, including Facebook and Instagram, it's still over 16 times Snap's ARPU for North America. Snap's North America region includes Mexico, which generally produces lower revenue per user than the U.S. and Canada. Still, MKM Partners analyst Rohit Kulkarni estimates Snap's U.S. ARPU is about $14 versus $180 for Facebook.

UBS analyst Eric Sheridan estimates Snap will grow ARPU between 5% and 15% this year (a slowdown likely due to secularly depressed ad pricing). He sees that growth rate climbing to 30% next year. Sheridan thinks improved advertising products like the Dynamic Ads launched last October will propel ARPU higher.

Snap has a lot of room to improve its ad products, but trying to compete with Facebook for digital advertising budgets is a tough task. Facebook has much more data on its users and a broader audience. Not only that, but Facebook's feed format lends itself to ads that convert better. Even Facebook's own Stories ads don't offer advertisers the same value as its core feed ads.

If Snap wants to compete for ad budgets, it needs better data on its users' interests, habits, and demographics. Snapchat was built with more user privacy in mind, but the company is moving toward collecting more data on its users to be able to target ads more effectively.

The real potential within Snapchat

Snap released a bevy of new features at its developers conference earlier this month, many of which have the potential to increase revenue per user both directly and indirectly.

One of the products with a lot of potential is mini apps. Mini apps extend the functionality of Snapchat, allowing developers to build new applications on top of the messaging app. CEO Evan Spiegel sees e-commerce as a promising application for mini-apps. 

Growing e-commerce on Snapchat would provide Snap with an opportunity to partake in transactions, but it could also provide additional data to feed into its advertising technology. Knowing what users spend their money on is extremely valuable to advertisers. But Snap isn't the only social media company pursuing e-commerce. Facebook released Shops earlier this year, which lets retailers set up virtual storefronts on its platform.

Snap also announced new Snap Games. Snap Games have seen good traction since the company first launched them last year. The increased engagement from casual gaming should lead to more advertising opportunities for the social media specialist.

Snap's also changing the navigation menu for Snapchat. It's giving extra attention to Snap Maps, a feature that's been more hidden in previous designs. Snap Maps holds a lot of potential for monetization through more local business advertisements.

Snap has long struggled to monetize time spent on Snapchat, seeing significantly lower ARPU than its competitors. But the tech company's continued innovations to obtain deeper engagement and insights into its users' behaviors should ultimately support higher revenue per user.

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. Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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