After reporting a revenue and earnings beat in its third quarter of 2020, Snap stock has risen over 36% this week. The social media company reported a year-over-year (compared to the third quarter of 2019) 19% increase in daily active users (249 million from 210 million), 29% increase in revenue per user ($2.73 from $2.12), and 52% increase in revenue ($678.7 million from $446.2 million).
The top half of Snap’s 10-Q filing was littered with positives, laying out a story of decreased net losses as well as noteworthy gains in revenue and users. The bottom half completes the story, detailing the company’s heavy reliance on advertising revenue.
The company does a great job laying out the risks related to its business. One of them was detailed as such:
“Moreover, the majority of our users are 18–34 years old. This demographic may be less brand loyal and more likely to follow trends, including viral trends, than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement.”
It is true that Snap relies on the younger generations: according to CEO Evan Spiegel, Snapchat reaches 90% of 13–24-year-olds and 75% of 13–34-year-olds in the United States.
Relying on that audience to stick around would be a bad business decision, but there is also no reason to believe they would flee anytime soon. Snapchat offers an experience no other app does. Even with other social media sites such as Facebook, Instagram, and even LinkedIn copy-and-pasting Snapchat’s “Story” feature, the camera app still gives its user base the most seamless way of contacting friends.
Social media apps aim to have “stickiness,” which is another way of saying they want to keep people on the app so the ads have more reach. Snapchat’s featured stories do help keep users around, but for the most part, it’s tough to keep users on the app for too long.
Unlike the other apps, though, this actually helps Snapchat.
One of Snapchat’s most unique traits is that Snaps disappear. Stories are only around for 24 hours and individual snaps go away once they are opened once (but can be replayed). The app doesn’t offer the overwhelming clutter of content that apps like Facebook, Twitter, and Instagram do.
Thus far, this lack of stickiness hasn’t scared any advertisers away, as Snap’s revenue jump would suggest. Advertisers know that, aside from TikTok, Snapchat is the best way to reach young people on the internet.
While Snap has a captivated audience of users that continues to grow, it also continues to spend, keeping it unprofitable. The company hopes to improve daily active users by another 3% in the next quarter with an increase in expenses pared with it.
A bet on Snapchat’s user and advertising revenue growth may pay off in the long-term. The world’s 18–34 market, particularly in North America, is using Snapchat. They are communicating with friends and keeping up with the app’s featured stories. At some point during their time spent on the app, they are consuming ads.
Snap, which has been monetizing its platform since 2015, still has a long way to go before reaching the levels of Facebook, an advertising social media giant. The good news for Snap is that Facebook also relies heavily on advertising, making up about 98% of its quarterly revenue — in line with where Snap is now.
Facebook had 1.8 billion daily active users in its last quarterly report and $18.3 billion in revenue, however — $10.17 dollars per daily active user. Even with over 1,000 companies withdrawing ad placements on the platform this year, some of which moved their money to Snapchat, the company has still seen advertising revenues rise year-over-year.
Facebook actually became even more profitable when the younger generation fled and the older generation took over. This may not be a replicable recipe for success should a new social media wave steal the youth from Snapchat. But it does show that a revolving door of user demographics doesn’t guarantee a financial demise. It may even open a more profitable door.
Profitability will matter down the line for Snap. For now, though, a continued rise in daily active users and revenue will suffice. If it can continue this pace in upcoming quarters, Snap will creep closer and closer to “sure thing” status.