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IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally. Many companies are also operating with employees working remotely from their own home.
For Q1 2021, Snap reported revenues of $770 million, up by 66% y- o-y. Net loss decreased to $286 million, down 6% y-o-y. Diluted earnings were recorded at -$0.19 compared to -$0.21 in the same period of the previous year. Free Cash Flow improved to $126 million. In Q1 2021, the company saw growth to 280 million daily active users, up 22% y-o-y.
Below are key drivers of Snap's value that present opportunities for upside or downside to the current Trefis price estimate:
Snap's Average Revenue Per User (ARPU) in North America remains the single most important driver of its valuation. Snap has taken a cautious approach to its advertising business, rolling out ads only in 2014, while ensuring that ads are engaging and non-intrusive to improve the user experience and protect its advertisers' brands. We expect the company's advertising revenues per North American user to rise from around $12 in 2019 to over $36 by 2024, as Snap increases its ad load and ad rates while doubling down on its programmatic offering. If the company can increase its ARPU to over $50, driven by higher engagement levels and demand from advertisers, it could increase our price estimate by about 30%. On the other hand, if ARPU grows to only about $25, on account of hiccups in the monetization strategy or stronger competition for mobile ad dollars, this could reduce our valuation by around 15%.
For additional details, select a driver above or select a division from the interactive Trefis split for Snap at the top of the page.
Snap refers to itself as a "camera company," but the company’s flagship product is smartphone app Snapchat, which allows its users to communicate via ephemeral short videos and images. The company had 184 million average daily active users in 2019. Snap earns revenue primarily via advertising in its Snap stories and also via creative tools such as filters and lenses. The company ventured into the hardware space in late 2016, with a product called Spectacles, which are sunglasses that allow wearers to capture short video clips.
We estimate that the company's North American Advertising business is more valuable compared to its International Ads and Spectacles due to:
Snap's average annual revenue per daily active user in North America stood at close to $13 in 2019, roughly 2x the figure for international markets. This is due to weaker purchasing power in many international markets, as well as Snap's focus on scaling up its U.S. ad business before focusing on international markets. While we expect ARPU growth rates in international markets to be slightly higher over the long-term, we believe that the spread between International and North American ARPU will remain significant.
Internet services businesses such as social networks and messaging have high margins, as direct costs (such as cloud infrastructure) are relatively small in proportion to revenues, with other costs such as R&D remaining largely fixed. This is in contrast to hardware businesses such as Spectacles, which see significant costs relating to manufacturing, distribution, and inventory management.
Snap burned through $819 million in free cash in 2017, with its net losses also widening. While this was acceptable over the last two years, given the investments required to drive user growth, the company's DAU metric has slowed in recent quarters, amid mounting competition from Facebook and potentially diminishing marginal returns on investments. That said, Snap has significant potential to boost its monetization, given that it caters largely to the affluent North American market. Snap’s average revenue per daily active user for North America stood at under $9 in 2017, compared to levels of roughly $60 per user on Facebook.
Snap stands to gain significantly from several ongoing trends in the advertising market:
1. The shift of ad dollars to mobile: Mobile advertising constitutes the fastest-growing segment of the ad market, and is expected to grow from $66 billion in 2016 to $196 billion in 2020. In contrast, all other advertising spending is expected to decline by about $15 billion during the same period. This should help Snapchat, as it is a mobile-only platform.
The shift from traditional media also means that advertisers are having a difficult time reaching younger audiences, providing an opportunity for Snapchat, which primarily caters to younger demographics. About 85% of Snap's users in the United States are in the 13 to 34 age group, compared to under 50% for Facebook.
2. Video opportunity: Video ads will likely become a major growth area within the mobile space. According to a report from Nielsen, people between the ages of 18 and 24 spent 35% less time watching television on average per month during Q2 2016 compared to Q2 2010, as users spend more time-consuming media on mobile devices. This should prove beneficial for Snap, considering that it is primarily a video-focused platform. This could potentially help Snap capture some of the ad dollars currently going toward TV ads. TV accounts for roughly 40% of the $600 billion spent on advertising around the world.
3. Focus on U.S. markets: Advertising spends in international markets are still much lower compared to developed markets such as the U.S., given the lower purchasing power. Snapchat’s user base is largely concentrated in North America, where ad spends are likely to remain significantly higher for the foreseeable future. For instance, Mobile ad spending in the United States is projected to stand at $88.8 billion in 2020, per IDC, a sum which is more than the next nine top ad markets combined.
Snap ventured into the hardware space with its Spectacles wearable camera in late 2016. It referred to itself as a camera company in its IPO prospectus, indicating that it is likely willing to take risks to create innovative camera products. While such products could help Snap improve revenues, we believe that the core Snapchat platform - which engages over 150 million users every day - will remain the company's most valuable asset. Snap must ensure that its other endeavors serve to enhance the platform, either via increased customer loyalty or engagement. The company's platform - which facilitates interactions between users - will likely be more valuable compared to products, as products require a significant amount of resources, time and capital to develop, and need to compete based on differentiation. This platform-focused strategy has paid off handsomely for companies such as Facebook and Google. To the extent that Snap keeps its hardware ambitions in line with bolstering the core platform, the company should be able to justify and potentially improve its valuation.
Snapchat has demonstrated that it understands the latent needs of users in the 18-24 age group - a highly sought-after demographic for advertisers- better than most other Internet companies. The Snapchat app has evolved in recent years, with various features that have been well-received by its core user base. The app began with disappearing messages as its core interaction, after which Stories and Discover were added, essentially turning Snapchat into a media platform. However, Snap faces a significant threat from social media behemoth Facebook, which has posted substantial growth driven by its early start and shrewd acquisitions such as WhatsApp and Instagram. Facebook has been implementing Snapchat-like features such as Stories on WhatsApp and Instagram, and there is a possibility that this could hinder Snap's growth - particularly in international markets, where Facebook products are widely used.