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Would TikTok’s Downfall Make Snapchat a Buy?

By Leo Sun – Updated Jul 10, 2020 at 10:20AM

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One of Snapchat’s top Gen Z rivals gets slammed by a double whammy of bad news.

ByteDance's TikTok (known as Douyin in China) caught fire after its launch in late 2016. The short video app attracted 500 million monthly active users (MAUs) by mid-2018, then surpassed 800 million MAUs earlier this year.

TikTok's meteoric rise seemingly threatened Snap's (SNAP 4.99%), which targets the same Gen Z market with its ephemeral messages and short videos. TikTok clearly covets Snap's core market: It bought so many ads on Snapchat it became its top advertiser last year, according to MediaRadar, and it poached over a dozen employees from Snap.

That's why a double whammy of bad news for TikTok recently boosted Snap's stock. First, Indian regulators banned TikTok, along with dozens of other Chinese apps, citing privacy concerns and escalating tensions with China. Second, Secretary of State Mike Pompeo claimed the U.S. was also "looking at" a ban on all Chinese social media apps, including TikTok, during a recent Fox News interview. Could TikTok's recent regulatory pain generate long-term gains for Snap's investors?

A young woman takes a seifie.

Image source: Getty Images.

Are Snapchat and TikTok rivals or peers?

Snapchat's core business is built on disappearing apps, photos, and videos, and its extended ecosystem includes short Discover videos, AR lenses, and video games. Snapchat's main network is focused on private connections with peers, but users can upload public videos to its searchable Snap Map.

TikTok's platform is built for quickly sharing short videos, usually paired with music clips, to a broad audience of both followers and strangers. TikTok's default settings allow users to share all their videos publicly, and they need to tweak the settings to upload private videos instead.

In short, Snap and TikTok are both popular with teen users, but they're very different apps. Snap CEO Evan Spiegel actually referred to TikTok as a "friend" and a top advertising partner during a conference call last October, and there's no real evidence that TikTok is stealing away Snapchat's users.

Between the first quarters of 2016 and 2020, Snapchat's daily active users (DAUs) grew from 122 million to 229 million, while its average revenue per user (ARPU) surged from $0.32 to $2.02. Those robust growth rates coincide with TikTok's expansion, and they suggest there's plenty of room for both apps to grow without trampling each other.

But clipping TikTok's wings could still help Snap

Nonetheless, Snap and TikTok still have overlapping interests. Snapchat's Snap Map and Discover videos target TikTok's audience of short video viewers, while TikTok's direct messages compete with Snapchat's messages.

A young woman takes a selfie.

Image source: Getty Images.

Snap also considers India to be a major growth market (it opened its first office last year). It now offers the app in multiple Indian languages, and is developing more localized and "culturally relevant" content for its Indian users.

Snap doesn't disclose its exact growth rates in India, but chief business officer Jeremi Gorman declared it was "growing rapidly" in the region during last quarter's conference call. That growth could boost Snap's total DAUs in its Rest of World region, which rose 45% annually to 71 million last quarter.

TikTok's troubles in the U.S. could also strengthen Snap's North American business, which grew its DAUs 10% to 88 million last quarter -- but still expanded at a slower rate than its European and Rest of World regions.

Snap's investors should maintain realistic expectations

Snap could clearly benefit from TikTok's troubles, but investors should recall that Snapchat also faces fierce competition from Facebook's (META 7.89%) Instagram, which cloned many of its popular features. It was arguably competition from Instagram, not TikTok, that caused Snap's sequential DAU growth to stall out throughout 2018. Banning TikTok could merely send more short video creators -- and their followers -- to Instagram.

Therefore, Snap investors should maintain realistic expectations amid a flurry of bullish predictions regarding TikTok's problems, and realize a lot of that potential growth could already be baked into the stock -- which has nearly doubled over the past three months and trades at a frothy 13 times next year's sales.

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. Leo Sun owns shares of Facebook and Snap Inc. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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