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Why a TikTok Deal Shouldn't Scare Snap Investors

By Leo Sun - Aug 6, 2020 at 8:15AM

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TikTok’s fate shouldn’t affect Snapchat over the long term.

Snap's (SNAP 4.59%) stock has risen and fallen with the ever-changing news about ByteDance's TikTok over the past month. First, the Trump administration's threats to ban TikTok over its ties to China lifted Snap's stock, since TikTok competes against Snapchat for the attention of Gen Z users.

But shortly afterward, the discussions of an outright ban evolved into a potential sale of TikTok's U.S. business to Microsoft (MSFT 1.70%). Snap's stock dropped on the news, presumably because Microsoft has the resources to aggressively expand TikTok's audience and ecosystem.

Those developments initially seem significant for Snap, but it's all near-term noise, and it won't meaningfully affect Snapchat for four simple reasons.

Three young women take a selfie at a party.

Image source: Getty Images.

1. Snapchat and TikTok aren't direct competitors

Snapchat and TikTok are both popular with teen users, but they're different types of apps with a minor overlapping presence in short videos.

Snapchat offers vanishing messages, photos, and videos, and its expanded ecosystem includes short Discover videos, AR lenses, and in-app video games. Snapchat's users can also upload public videos to its searchable Snap Map.

TikTok is designed for creating and sharing short videos, usually synchronized with music clips, to public viewers. Its default settings allow users to share their videos publicly, but the settings can be adjusted for private sharing.

Snap Map indirectly competes against TikTok, but Snapchat's core platform focuses on private connections, while TikTok serves up a stream of public short videos. Therefore, it's unlikely that one app will replace the other.

2. Snapchat thrived throughout TikTok's growth spurt

TikTok and its Chinese version, Douyin, have accumulated over 800 million monthly active users (MAUs) since launching in late 2016. That growth rate is alarming, but Snapchat's growth remained robust throughout the same period.

A young woman takes a selfie.

Image source: Getty Images.

Snapchat hit 150 million daily active users (DAUs) in 2016 and ended last quarter with 238 million DAUs. Its total DAUs grew 17% annually during the quarter, marking its fourth straight quarter of double-digit growth.

Piper Jaffray also recently found that 82% of U.S. teens regularly engaged with each other on Snapchat, compared to just 62% on TikTok. Facebook's (META 1.70%) Instagram, which had an engagement rate of 85%, still leads the market. These numbers suggest Gen Z users are using all three apps simultaneously instead of favoring one over the other.

3. Snap's international growth matters more than the U.S. market

Snap's DAUs in North America rose 9% annually to 90 million last quarter, but its DAUs in Europe grew 12% to 71 million as its rest-of-world DAUs soared 37% to 77 million.

Snap still generates much-higher average revenue per user (ARPU) from its North American DAUs, but the key to its long-term growth lies overseas, in emerging markets like India -- which banned TikTok amid escalating tensions with China earlier this year.

Therefore, the fate of TikTok's U.S. operations won't meaningfully affect Snap's overseas expansion into higher-growth markets.

4. Microsoft could strangle TikTok

The bears seemingly believe Microsoft's investment in TikTok will make it a more formidable threat to Snapchat and Instagram.

However, ByteDance is already the world's most valuable start-up with a valuation of $110 billion, and its constant flow of venture capital gave it plenty of freedom to expand with low-margin strategies. It also reportedly made a profit of $3 billion on $17 billion in revenue last year.

ByteDance was clearly a powerhouse on its own, and a Microsoft takeover won't significantly increase its firepower in the social media market. Instead, a takeover could inadvertently strangle TikTok with tighter cost controls, aggressive monetization measures, or poor marketing strategies.

The key takeaways

As a Snap investor, I realize the social media underdog faces near-term challenges -- including its decelerating DAU growth, sluggish ARPU growth, and lack of profits. The stock also isn't cheap at 15 times this year's revenue.

Yet I'm not concerned about TikTok's fate at all. TikTok is different from Snapchat, and whatever happens to the former should only have a minor impact on the latter over the long term.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. 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 and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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