Snapchat was founded by Evan Spiegel, Bobby Murphy, and Reggie Brown as a way to bring honesty back into the social media landscape. The founders were tired of “perfect” online photos of their friends that failed to capture the real context of what was happening. In 2011, the first version of the app, “Picaboo,” offered users the ability to send and receive disappearing pictures. As the company grew, so did the egos and tensions between the founders. By 2012, Brown was forced out of the company by Spiegel and Murphy, but settled with the two for a $157M sum in 2014. Brown is legally credited with the disappearing-pictures idea.
The app was eventually renamed Snapchat, and now Snap Inc. includes the Snapchat App, Spectacles, and Bitmoji. Spectacles are Snap’s sunglasses that allow users to take snapchats. Although it sounds cool, Spectacles account for a negligible part of the company’s overall revenue.
Bitmoji allows users to create personalized cartoon-like versions of themselves to interact on the app. Snap acquired the rights to Bitmoji in 2016, and the cartoon stickers have soared in popularity after they were integrated into the Snapchat app.
Since the IPO
Snap’s IPO in 2017 was somewhat successful, but the company’s share price dropped drastically throughout the rest of 2017 and 2018. Investors felt like competition from Facebook and more specifically Instagram in the “stories” category would stunt the growth of Snap (which it did), and that important metrics like Daily Active Users (DAU) and Average Revenue Per User (ARPU) would be compromised in the long term. During Snap’s downward slide Kylie Jenner even tweeted in February of 2018 that she “doesn’t open Snapchat anymore,” which caused the price of Snap to fall 6% that day.
Snap rallied from a low of less than $5 in late 2018 and reported some good consecutive quarters in 2019. Consecutive quarters of accelerating revenue growth in 2019 led investors to believe they might have been wrong about Snap and its founders. Snap is already somewhat of a comeback story in 2020 and has more potential to grow the quality of their business in the long-term.
How did Snap turn around?
One of Snap’s largest issues was compatibility with Android. Users had trouble accessing the Snapchat app, and as a result, stopped using the app altogether. As of 2019 there were about 2.5 billion active Android devices worldwide, so without a properly functioning app, Snapchat’s total addressable market took a massive hit. However, by April 2019, Snapchat successfully released a new version of the app to address the issues with Android users. They are now seeing positive growth in international markets like India, where Androids are popular.
The company also used updates to fix issues for iPhone users. These changes, which are usually met with criticism at first, boosted user growth throughout the rest of 2019 into 2020. Snap reported 229M DAU in the first quarter of 2020, up 20% from Q1 2019. More importantly, user growth brought advertisers back to the platform. ARPU went from $2.09 in Q4 2018 to $2.58 in Q4 2019, an increase of 23%.
Snap’s corporate culture has grown along with its success. The company is generally highly reviewed as a place to work, and even holds “Council,” or meetings where employees get together to chat about what’s currently going on in their personal lives. Plus, there seems to be more focus from co-founder Evan Spiegel, who, among other things, was infamous for showing up to 30 minutes of a 12-hour investor’s day before the company’s IPO.
What does Snap actually offer?
The Snapchat App: Snap’s camera app, Snapchat, can be downloaded by mobile device users for free. The app was built for users to send “snaps,” which are pictures or videos, to other users. Snaps grew at double the pace of DAUs in 2019, making the Snapchat camera one of the world’s most used cameras. The following offerings are within the Snapchat app, which has been expanded into a multi-faceted social media outlet.
Augmented Reality: Users can experiment with augmented reality filters, or “lenses,” which have become a hugely significant phenomenon both from pop culture and a tech perspective. Snap lenses were part of some of the most recognizable trends on the internet, including a filter where people could turn themselves into babies and another where users could see themselves as the opposite sex. From a tech perspective, Snap lenses were one of the first widely used augmented reality applications in the world. In Q2 of 2020, 165,000 unique snap lenses were created, and it’s likely that number will continue to grow.
The Discover Page: The “Discover” page allows users to follow friends’ stories and different media Snap channels. For example, a user could go to the discover page within the Snapchat app, and click on the ESPN window to watch an episode of Sports Center. The discover page allows Snap to redistribute premium content from media channels without having to rely on single influencers, like Instagram or TikTok does, to drive user engagement. Moreover, it’s tailored to each user based on their own subscriptions and interests.
Friends Page: Snap offers a “friends page” that allows users to communicate with voice and video calls, and also use contextual stickers and Bitmoji’s.
Memories: Users can save their snaps in a searchable personal collection. They can also edit and create new snaps from pictures saved to their mobile device.
The Snap Map: The Snap Map allows users to see the location of other friends and discover popular stories and “heat maps” of places where snap activity is high around the world. The Snap map has recently been upgraded to include recommendations for users, like where to hang out or what restaurants are worth a visit.
How Does Snap Make Money?
Snapchat only generates revenue through advertising. Snap posted a $1B loss on $1.7B in revenue in 2019. In fact, Snap has posted net losses in each of its last five years, but these losses have been decreasing since 2017. While the absolute losses are pretty startling, it’s clear that the company is reinvesting for growth. Additionally, Snap’s revenue growth rate has accelerated again after it halved from 2017 to 2018. Revenue grew 45.3% in 2019 compared to 43.1% in 2018. The company still has negative free cash flow, but once again, there is reason to be optimistic after a large improvement in 2019.
More on Advertising
Advertising can be done on the Snapchat platform in a ton of different ways.
For example, Snap Ads are similar to the way that users post stories while providing additional features like long-form video, and the ability for users to visit an advertiser’s website or install that advertiser’s app. This ad form pops up on different channels in the discovery page. It’s important to note that these Snap Ads compromise the entire phone screen of the user when they appear, which is proven to drive more engagements than ads only on part of a mobile device screen.
Snap also offers advertisers the ability to use Sponsored Creative Tools like Sponsored Geofilters and Sponsored Lenses, providing ways for users to interact with the advertiser’s brand and create their own experiences with the brand’s identity. For example, the NBA recently promoted the restart of the 2020 season by giving users lenses of all 32 NBA teams, so it looks as though users are wearing their favorite team’s uniform.
Snapchat competes with companies like Apple, Facebook (including Instagram and WhatsApp), Google (including YouTube), and Twitter, all of which have more financial resources than Snap. The company also competes with firms like Kakao, LINE, Naver (including Snow), Bytedance (including TikTok), and Tencent in Asia.
Snapchat has seen considerable competitive improvement in the last year and a half. The company reaches more 13-34-year-olds than Facebook or Twitter. And surprisingly, Snapchat is close to beating Instagram in time spent on the app. The average Instagram user spent 53 minutes per day on the app, compared to the Snapchat user’s 49.5 minutes. That’s a pretty great comparison considering all of the hate that Snapchat has got in the past for lacking user engagement.
While Snap may compete with common media outlets, it also serves as a way for some to expand their audiences. More than half of the Gen Z population watches Snap News including The Washington Post, Bloomberg, Reuters, NBC News and many more, all within the Snapchat App.
What’s Next for Snap?
At the Snap Partner Summit in June 2020, Snap released some exciting new products and upgrades, which could provide it with a great deal of optionality.
First, Snap is now partnering with advertisers to improve augmented reality ads and to enhance the impact of the Snap Ads experience. For example, Snap recently signed a large deal with Adidas, where part of the campaign allows users to “try on” shoes using Snap filters before users purchase the shoes. Robb Seidu, Senior Director of Media Activation at Adidas, said in an interview " With e-commerce a key focus for us in 2020 and beyond, we were excited to beta test Snapchat's Dynamic Ads in the U.K., Germany, France and the Netherlands. Within weeks, we saw 52% growth in return on advertising spend, and we subsequently have grown our investment." Snap has also initiated similar partnerships with luxury brands like Gucci and Dior.
Secondly, Snap has introduced Snap “Minis,” which allows users to send third party, “mini” applications to their friends as a way to interact on the platform. For instance, minis allow users to watch a video clip together or play a game against each other.
The company is also introducing a number of other upgrades to the app, including updates to Snap Maps, Lens Studio, and Snap Games. The important thing here is that with fierce competition for the engagement of users across different social media platforms, Snapchat is doing everything possible to gain traction from a variety of different angles. Simply put, more user engagement means ads are more impactful to their audience, and in turn, brings more advertising revenue to Snap.
Snap has also observed some positive trends during the pandemic. Although the company hasn’t released Q3 guidance, they saw a 36% jump in install volume and a 19% jump in swipe up rate, measuring active engagement on the platform in late March from a month earlier. Messages among “best friends” were at a record high by the end of March 2020, and Snap also saw a 50% increase in voice and video calls in the same period. Finally, Snap saw a record high in the use of their games and in the amount of time watching its video programming.
Analysts expect Snap to reach profitability by 2022, but there’s much more to Snap than just the amount of time it will take to become profitable. Snapchat advertisers focus on the audience that is not watching TV. According to eMarketer, the average U.S. adult spends 29 more minutes on their phone compared to TV, which is up 6 minutes from 2018. What’s interesting is that Snap serves 90% of 13-24 year-olds in the U.S. Young people and adults are more distracted than ever from traditional ads because of the countless offerings on their mobile phones. Snapchat is one of the few ways that advertisers can reach this demographic. Given their dynamic list of offerings, Snap is in a favorable position to expand on its foothold in social media advertising by engaging users in ways that other platforms can’t.
As a leader in AR, it seems like Snap has ambitions to become a super app. Copying Tencent’s WeChat in the form of mini applications is just one part of a growing body of evidence. From video calling to news aggregation to a Foursquare-esque map, Snap’s optionality is promising. While it can be difficult to tell from the GAAP financials, I believe it’s definitely one to watch.
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