INTRO: SnapChat is one of the most popular social
media platforms in the world especially amongst gen Z.
Amongst many teengagers and young adults, Snap has become a verb similar to Google or
Venmo.
Yet, despite their popularity, like most tech companies and startups, they’ve lost money
for most of their life.
In fact, the last quarter of 2021 was the first profitable quarter in the company’s
history as a public company.
SnapChat proudly announced this news near the top of their quarterly report likely with
optimistic expectations for the stock.
Yet, it’s been months since this report came out, and SnapChat stock is still doing
worse than ever before.
Since their peak in September of 2021, SnapChat fell a total of 70% which correlates to a
market cap loss of $95.8 billion or nearly $100 billion.
Over the past several weeks, they have recovered a substantial amount, rallying over 50%.
But, even with this significant rally, they’re still down over 50% from their all time high.
So, what happened to SnapChat?
HISTORICALLY BAD: Taking a look back, such terrible stock performance
is unfortunately not new to SnapChat.
In fact, for most of SnapChat’s public life, their stock price has performed horrendously.
Right after SnapChat set an all time high following their IPO, they proceeded to crash
83%.
And this wasn’t some quick 3 or 4 month crash like the Covid crash either.
This was a long and drawn out sell off that lasted nearly 2 years.
By the time the sell off ended, SnapChat was literally a penny stock coming in at less
than $5 a share.
This wasn’t to say that SnapChat was fundamentally performing bad though.
In fact, SnapChat is yet to even have a single negative quarter in terms of revenue growth.
Nonetheless, it seems like investors don’t want any part of SnapChat, and that brings
us into SnapChat’s first shortfall which is a lack of a strong investor base.
Despite being on the market for over 5 years now, SnapChat has struggled to attract investors
because they lack a differentiating factor.
Now, users of SnapChat would likely disagree with this statement given that despite Facebook
and YouTube’s best attempts to replicate the best features of SnapChat like stories,
most SnapChat users have preferred to continue using SnapChat for specific use cases.
It seems like SnapChat has mastered casual conversations better than any of their competitors.
But, from an investor's perspective, who cares if SnapChat fulfills some niche role within
young adults lives?
On paper, Instagram is superior in almost every way.
For example, in terms of demographics, 18-24 year olds are SnapChat’s biggest customer
base with 13-17 year olds making up nearly a quarter of their user base.
Meanwhile, Instagram’s largest demographic is 25-34 year olds with second place going
to 18-24 year olds.
Instagram’s 13-17 year old base is almost non-existent while their 35 years and up demographic
is actually quite substantial.
Now, if newer generations don’t switch over to using Instagram, that could be a long term
problem.
But, for the time being, Instagram has no shortage of users, and all of their users
are significantly older than SnapChat users which means that they have more money, are
more monetizable, and are of course more profitable.
This directly aligns with household incomes studies conducted on both platforms as well.
SnapChat use is most common amongst households with incomes between $70 and $80,000 per year.
Meanwhile, Instagram use is most common amongst households with incomes above $100,000 per
year.
Again users with more money equals more profits.
Something else to note about SnapChat’s demographics is that it's mostly just limited
to the US.
SnapChat has 109.5 million users within the US which is nearly more than all of their
users in all these countries combined.
If we take a look at Instagram’s usage by country, we can clearly see that it's a lot
more spread out, especially amongst emerging countries.
So, from an investors perspective, there’s very little reason to bet on SnapChat over
Facebook.
If you want to target millennials and older, Instagrams the way to go.
If you want to target people with money, Instagrams the way to go.
If you want to target emerging countries, Instagram is the way to go.
The only reason to invest in SnapChat is if you think that younger generations in the
US will continue to use SnapChat over Instagram which could very well be true.
But for this to become a financial advantage for SnapChat, we’ll likely have to wait
another 5 to 10 years at the very least.
And, in the meantime, SnapChat will likely remain the underdog amongst investors.
APPLE PRIVACY CHANGES: Aside from SnapChat’s unlucrative demographic,
SnapChat was also hit hard with Apple’s privacy changes that rolled out last year.
If you guys aren’t aware of this yet, in April of 2021, Apple rolled out a feature
called App Tracking Transparency.
This feature allows users to choose if they want to let third party apps collect data
regarding their usage for advertising purposes.
And as you would guess, basically everyone opted out.
According to this study, only 4% of Americans were opting in to tracking, and I have a feeling
that a lot of these guys may have accidentally pressed allow.
SnapChat’s CEO Evan Spiegel was actually a big proponent of this move.
In fact, he believes that these privacy changes were good for iPhone consumers and the social
media ecosystem in general.
But, despite his moral support for the change, this change was obviously not good for SnapChat’s
financials.
In October of 2021, Evan announced that Apple’s privacy changes have actually been affecting
revenue more than they originally anticipated.
And to make things worse, SnapChat failed to meet investors' already conservative revenue
estimates which of course sent the stock tumbling.
Given this unfavorable situation, Evan has chosen to focus on profitability which he
did accomplish.
But, this has left many investors wondering, at what cost?
Sure, it’s nice to invest in a profitable company, but the primary reason most SnapChat
investors made the investment was because of growth expectations.
And now it seems like Evan is trying to appease investors with relatively small profits.
SnapChat doesn’t have a PE ratio quite yet as that requires a full year of profitability,
but even if we take their net income of $22.55 million from last quarter and extrapolate
it to a year, we only get about $100 million.
Now, this isn’t a bad amount by any means, but compared to their market cap, this gives
them a PE ratio of 673.
Even if we say that SnapChat’s profitability grows to $250 million per quarter or over
10x from where they are currently, their PE ratio would still be quite high at 67.3.
To put that in perspective, Facebook’s PE ratio is under 20.
This isn’t exactly a bad thing given that SnapChat should theoretically have a lot more
growth left than Facebook, but that’s the key, they need to have growth.
And with Apple’s recent privacy policy changes and potentially more on the way, investors
aren’t quite convinced to give SnapChat even more credit.
THE TIK TOK PHENOMENON: At this point, you may be thinking what could
possibly be worse than having slower growth and a less profitable user base.
Well, the answer is being replaced.
But wait a minute, SnapChat has a massive user base, most of whom are young, so SnapChat
won’t be going anywhere anytime soon right?
Well, while that may be true, that doesn’t prevent an old or new competitor from overtaking
SnapChat.
Just take a look at TikTok.
TikTok wasn’t released till September of 2016, yet it was the most visited site in
the world in 2021.
This isn’t to say that it’s easy to replicate TikTok’s success, but it makes it clear
that the barrier for entry is extremely low within the social media industry.
From an app development perspective, it’s not particularly hard to create a social media
app.
What’s hard is garnering users and 99.999% of social media apps will never garner the
same user base as someone like SnapChat or Facebook.
But, from SnapChat’s perspective, only 1 or 2 of the millions of social media apps
out there need to catch on for SnapChat to lose user engagement to these new apps.
And from a user's perspective, if a new better app comes out, the only thing stopping you
from switching over is your social circle also switching over.
If your social circle also switches over, you’ll probably never look back, and this
has been shown time and time again within the social media industry.
First, there was Friendster, then there was MySpace, then we had Facebook and Twitter,
and after that we had Instagram and WhatsApp, and now we have SnapChat.
What’s to say that SnapChat wont eventually be phased out as well?
Well, the truth is that all companies are eventually phased out, it’s just that the
phase at the top is rather short lived for social media companies due to the low barrier
of entry.
Take Apple for example.
They also won’t stay at the top forever, but think about how much more difficult it
is for a company to come out with a smartphone and convince you to pay several hundred dollars
for it as opposed to an app developer coming out with a new social media app and convincing
you to give it a shot.
Obviously, the latter is magnitudes easier which is great for competition and evolution,
but not great for investors.
For example, just take a look at Twitter stock.
They really haven’t moved in nearly a decade.
Not to mention, Twitter has become unprofitable once again, and Jack Dorsey has left the company.
Really, the only social media stock that has performed extremely well historically is Facebook,
and that’s mainly thanks to their acquisitions of WhatsApp and Instagram.
Also, something to note about Facebook is that while they have performed well financially,
they’re one of the most hated if not the most hated company in the world.
So, I don’t think that’s necessarily something that SnapChat should strive for.
But at the same time, if they don’t make acquisitions and become the big tech company
that everyone hates, it’s just a matter of time until the new kid on the block overtakes
them anyway.
SNAPCHAT’S FUTURE: While this video has mostly pointed out the
shortfalls of SnapChat and the social media industry, I don’t think SnapChat is going
anywhere anytime soon.
They just became profitable, their user base is just starting to make money, and there’s
still plenty of user growth left for SnapChat.
So, I don’t think SnapChat has really hit their stride yet, meaning that SnapChat stock
likely has a lot of upside ahead.
But with that being said, I don’t think SnapChat is a lifelong long hold like many
other investments such as the S&P 500, Tesla, Bitcoin, Ethereum, etc.
Whether SnapChat peaks at a market cap of $300 billion or a market cap of $1 trillion,
I think it’s just a matter of time until they’re phased out, and I think the next
wave of phasing will be extremely painful.
I think the next phase will not only be a move away from SnapChat, but a move away from
traditional social media apps in general.
With more people being aware of how these companies make money, an increasing concern
for privacy, and more backlash than ever before against big tech, I think it’s highly likely
that the next big social media app will be some sort of decentralized or non profit endeavor
like Signal.
I suspect Mark Zuckerberg has similar beliefs, and that’s why he cut back on social media
acquisitions and is betting it all on the Metaverse.
With that being said, I think an investment into SnapChat would be more of a median horizon
investment of 10 to 15 years.
You may be able to get in, make a solid 10X and get out.
But, in my opinion, if you’re gonna commit to a stock for 10 to 15 years, why not commit
to something you can hold for life that can produce 30, 40, or 50X return?
But, that’s just what I think.
Would you guys invest in SnapChat?
Comment that down below.
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