Why Should You Buy Snap Inc. Stock?
This article is a modified version of the final paper, we submitted for Microeconomics as part of the core curriculum at Johnson Cornell Tech MBA. Team Members: Kate Min Jung Seo, Munazza Khan

Introduction
Snap Inc. is an Internet Media company that is best known for its multimedia mobile app Snapchat, which has evolved into one of the most popular social media apps currently in the market. Alongside Facebook and Twitter, we can define these three companies as Media-Tech businesses, which indicates that they are in the business of creation and distribution of digital content. While social media is its primary bread-and-butter, Snap also manufactures smart glasses called Spectacles, a wearable camera technology. Spectacles are essentially AR/VR hardware, and in this niche space space they are competing with Google, Apple and Magic Leap.
When Snap went public a little over a year ago, shares surged as high as $29 on its first two days of trading. Since then however, the company has failed to live up to Wall Street’s expectations, incurring a net loss of $3.4 billion as of December 31, 2017. Despite dismal financials last year, hopes for short-run profitability is not lost for Snap in the monopolistically competitive social media industry, as long as it continues to make strategic product improvements and maintain its high network externalities.
In this paper, we argue that social media is a monopolistically competitive market, and discuss the ways in which Snap Inc. can move into profitability in this marketplace. Over the last few years, Facebook, Twitter, and Snap have cemented themselves as the dominant players in the social media industry, each with key product differentiators and strong local network externalities. Social media platforms are built on a model of communication and user-generated content, and are only effective when users have their friends, families, and acquaintances on the same platforms. Due to this network externality effect, each of these platforms have been successful in growing daily average users on a consistent basis. We explore how these network externalities can be Snap’s largest asset as it advances towards a profitable business model.
As of Q1 of 2018, Snapchat has 191M daily average users (DAUs). With a creative, well-designed platform that makes it easy to capture and share quick moments with friends, it appeals largely to millennials and generation-z, creating very strong network externalities within that demographic. Snapchat continues to draw a high level of engagement among its core user base, as demonstrated by a 450% increase in Snap ad impressions in 2018 from 2017. During their Earnings Summary call in April 2018, Snap disclosed that the number of advertisers spending on the platform has grown 20X year over year.
Snap’s Growth in DAU and Revenue


Competition
Snap Inc.’s most formidable competitor is Facebook, primarily their image-sharing platform Instagram. Facebook started back in the day when millennials were growing up, and they adopted very well to the taste/psychology of millennials. They got the early mover advantage over other social networking sites such as Twitter, LinkedIn, etc. They applied persuasive user experience techniques and shifted the habits of people to keep using their product. But with time, millennials are now realizing the adverse implications of Facebook ecosystem. There is a consistent decline in time spent on facebook in the last few years and DAU in nations with higher GDP. This is primarily because of the way facebook’s core philosophy has shaped up during the past few years: It is heavily reliant on two things (a) showing off curated versions of particular lifestyles, making people more transactional in nature and creating a superficial aura (b) serving the content which confirms with your bias of the world, which has led to the problem of “fake news”. Snap, on the other hand, is built with the purpose of closed sharing within groups of friends, and is considered a more personal experience. It is more aligned with the tastes of generation-Z. Over the next decade, most consumer businesses will focus on maximizing revenue from this cohort of people, and that is where Snap has a clear competitive advantage. Recent reports observed that the daily time spent on Snap is increasing. Snap has also been expanding heavily in multiple countries — e.g. two years back India was not even a target for them, and today they are working with big ad networks in India to monetize their audience. In terms of content distribution, Snap recognizes that long-form written and video formats are becoming outdated, and are now working exclusively with studios and media companies to build short, to-the-point Snapchat specific content.
Omnicore analyzed that 71% of Snapchat users are under 34 years old, 45% of Snapchat users are aged between 18–24, and roughly 70% of Snapchat users are female in 2018 (Aslam). While 31% of Instagram users are aged between 18–24 and 50.7% are female in 2018 (“Distribution of global Instagram”). Obviously Snap has a strong branding and user pool in younger generations and female. For a long run profit in monopolistically competitive market, Snap needs to revise its marketing strategy to increase network externalities and to differentiate its target customers from other competitors. If they are able to keep adapting to the tastes of generation-z and capitalize on their network externalities, Snap can overtake Facebook in this market in the long-run.


Profitability Strategy
Monopolistically competitive markets have fewer firms than perfectly competitive markets do and the market entry is possible (Perloff, 424–425). Because competitors can still enter the market, firms can increase short term profit without any additional fixed costs if the short term demand increases and the product is competitive enough. Snap began commercial operations in 2011 and it has experienced net losses and negative cash flows from operations. It had an accumulated deficit of $4.7 billion for the year and experienced a net loss of $3.4 billion as of December 31, 2017. According to the 2017 annual report, the sales and marketing expense of Snap increased approximately 420% but the revenue increased only 200%, and the loss from operations increased 669% from fiscal year 2016 to fiscal year 2017(“Annual Report”). Also, high volume of research and development and operation costs have negative effects on Snap’s profit. Snap has tried to diversify its profit sources in 2015 but the launch of Spectacles in late 2015 has not generate significant revenue. Spectacles also incurred inventory-related charges and increased costs in connection with the development, sale, and marketing of hardware products (“Annual Report”). According to Business Insider, Snap has sold only 150,000 pairs, and less than half of Spectacles owners kept using the glasses after the first month (Heath).
There are a lot of warning signs of rapidly growing fixed costs such as operation, sales, research and development, marketing, etc. To make Snap more profitable and competitive, Snap needs to increase ROAS from the marketing and sales campaigns and lead generation strategy to gain more new customers. Because huge operating expense loss and excessive marketing and research cost threaten Snap’s profit and driving force to expand the business, Snap should analyze its fixed cost expense and try to reduce operating and marketing costs first.
In the monopolistic competition model, the long run profit becomes $0 as other firms enter and demand decreases. To keep the profit and competitiveness in the market, many companies put efforts on developing unique products, brand awareness, and network externalities. For a young media tech company like Snap, new customers and active user volume are crucial for the market extension and differentiation. If the growth rate of new users and active users doesn’t increase, there is a high possibility that Snap’s business will be seriously harmed. This is mainly because Snap’s business model relies on users, advertisers, and partners depending on the user engagement and traffic. TechCrunch pointed out that Instagram, one of the biggest competitors of Snap, has approximately 700 million active users in 2017 but Snap has only 300 million monthly active users in April 2018 (Etherington). Even though Facebook doesn’t announce the revenue of Instagram, many analysts assume that Instagram accounts for around 20% of Facebook’s total revenue, which is approximately $1.8 billion in 2017. The total marketing and sales expense of Instagram is around $945 million and the cost per active user is $1.35. However, the marketing and sales expense of Snap is around $522 million and cost per active user is $1.74.
In terms of the long run profits, Snap needs to consider how to reduce operating expenses and other fixed costs in the future as it expands operations and services. If the revenue and profits don’t grow faster than the current expenses does, it can’t get to profitability. Also, it should analyze current active users and potential target audience and increase market share for those people to earn higher revenue and establish market externality. Snap should continue to differentiate its product along the tastes of generation-z. They need to increase their content offering dramatically, and encourage more engagement and introduce media consumption points. Their users are growing in multiple countries and hence their bouquet of content needs to grow accordingly at the same pace. Localized content will be key. Even though their cost of acquiring one user is high, it will come down as they grow across countries since more network effects will kick in. Integrating competing social media platforms or features into new products such as search engines, web browsers, or mobile device operating systems will bring Snap more profits and increase market competitiveness.
Sources:
Snap CEO Evan Spiegel on Q1 2018 Results — Earnings Call Transcript, Seeking Alpha
“Facebook Annual Report 2017” Facebook Inc., Feb 1. 2018
“Snap Annual Report 2017” Snap Inc., Feb 22, 2018
“Distribution of Instagram users worldwide as of January 2018, by age group” Statista, 2018
Salman Aslam, Snapchat by the Numbers: Stats, Demographics & Fun Facts, Feb 13, 2018
Jeffrey M. Perloff, Microeconomics, Seventh Edition, Pearson, 2015,