Picturing the Future of Snap

With Snapchat stock mysteriously dropping below its IPO price earlier this month despite accelerating revenue and user growth, it’s worth taking a look at the controversial social media platform’s future.

By Sasha Agapiev

On paper, Evan Spiegel, famed Stanford dropout who co-founded the photo sharing service Snapchat, made the right choice by turning down a $3 billion acquisition offer from Facebook in 2013¹. Today, Snapchat is a publicly-traded company whose market cap is valued around $25 billion², more than eight times greater than Mark Zuckerberg’s initial bid. The company has around 220 million daily active users, which makes sense considering that around 70% of teens in the U.S use Snapchat³.

Over time, Snapchat has proven its durability in the highly volatile and unpredictable world of social media, as the company has weathered various storms of controversy and competition through the years to reach its $25 billion valuation. These are all the hallmarks of a genuine startup success story, one where a newcomer trusted their instincts and was able to challenge multiple corporate giants like Google and Facebook to prove itself as a real challenger.

However, for Spiegel and his fellow stockholders, this inspirational narrative of success has not translated to a rising stock price. On IPO day, Snap stock prices soared from $17.00 to $24.48, even breaking above $26.00 for a brief moment⁴. The stock reached its all-time high of $27.09 the next day, generating considerable profits for the investment banks which brought the app to market while also sparking hope for the future of the firm. Performance on IPO day gave many investors hope about Snapchat’s prospects as a public company, but in an accurate act of foreshadowing, the stock fell sharply over the next few days.

Right now, a price like $27.09 seems blindly optimistic considering that the stock has traded below its IPO price for the majority of its existence, and despite having regained some momentum after reaching a comically-low point of $4.99 in 2019, the latest earnings report sent it tumbling back below $17.00. This recent sell-off was a surprising and abrupt shift away from an objectively positive trend for the photo-sharing company — a trend supported by strong fundamentals, growing revenue, and diversification into a broad range of entertainment services. While providing valuable insight into the stock market’s treatment of social media platforms, Snap stock’s poor performance also leaves plenty of important questions unanswered.

One explanation for Snapchat stock’s reversion back to could be yet another case of investors frantically hedging against negative signals whenever possible. After all, the company earned $561 million in revenue for the last quarter of 2019, coming only $1 million short of Wall Street’s expectation of $562 million. This numbers should not spell bad news considering that total revenue has grown 44% since 2018, and that Snapchat’s advertising presence has been consistently growing while taking up smaller and smaller percentages of total revenue. The app has also released a variety of new features which have influenced how younger generations interact with social media. The most notable example has been through Snapchat Stories, a section on the app that allows users to share photos and videos with their friends for 24 hours, after which they delete automatically. Instagram, noticing the popularity of this feature, copied the idea directly onto their platform, taking the name and all⁶. To some, this move appeared desperate on the part of Instagram (under Facebook management) and momentarily gave Snapchat a better public image, but these views are now fleeting considering that Instagram Stories currently has more than twice as many users than the original⁷. This alone raises questions about the importance of innovation in the social media space, and whether it is really worth it for smaller entities to develop these types of features when a larger company can simply ‘rebrand’ these innovations and take over with their huge user base.

Snapchat appears to think that it is worth the effort to pursue constant innovation, as the company has released everything from Snapmaps to Bitmojis to a premium content section in the span of just three years. This ceaselessly iterative approach is reflective of the greater startup culture which Snapchat is a part of, where executives are encouraged to think fast and adapt quickly so they can thrive in an ever-changing world. If business schools and startups advocate for lean business structure, then this is a sign that Snapchat is taking a reliable path. Ultimately, for a company which caters predominantly to people with nonexistent attention spans (i.e: teenagers), this is a strategic approach for Snap and shows that management understands its position in the social media space.

Snapchat’s growing revenue and dynamic improvements to user experience both indicate that company management is optimistic about the future. Yet, the stock is still going nowhere, and as previously mentioned, investors were merciless when it came to an objectively-alright earnings report. So, is this a sign that traders are becoming more cautious when it comes to bad press? Is this an indication that social media hype has dissipated? Or, is this just a bad sign for Snapchat specifically?

Let’s tackle each question in order. With relation to the growing cautiousness of traders, it’s impossible to know their exact inclinations, but there’s strong reason to believe that Snapchat stock’s performance is a reflection of a greater loss in interest for daily social media services (more on that later). As for the second question, there are a few clear reasons which could explain why.

First and foremost, there was a stretch of time through 2018 when Snapchat was losing a significant number of daily active users. From Q4 2017 to Q4 2018, the company had not only failed to gain any DAUs, but it had lost close to a million overall. This was the time when people thought Snapchat had reached the end of a good run, and that this loss in users marked the beginning of a slow death. In typical controversial-startup fashion, Snap bounced back to break its losing streak, but future projections still look rough. According to recent forecasts from eMarketer, Snapchat will only gain around half a million DAUs by the end of 2023⁹. This is very slow growth for a Silicon Valley tech firm. Once you consider these facts, Snapchat’s business strategy of constantly pushing new features starts to look less like a fun idea-factory with branches in almost every division of entertainment, and more like a desperate attempt to stay relevant amidst a disinterested crowd.

Second and perhaps even more important is the fact that Snapchat is still not profitable, despite consistently growing revenues. There is not much to say about this that has not already been said, as Snapchat has been on the butt-end of many jokes for deciding to sign contracts with Amazon Web Services and Google Cloud Services rather than operating their own servers. How much does Snapchat pay Amazon and Google, you ask? The answer is startling— it will pay more than $3 billion in contracts covering 2018 to 2023¹⁰. From this perspective, Snap might as well be another subsidiary of Alphabet Inc. This alone could justify investor apprehension, but there are plenty of non-profitable tech companies that continue to make gains on the public markets, so there must be other factors in play.

One such factor could be bad precedent. Investors and journalists alike often refer to Twitter as a comparison point for Snapchat, which makes sense considering Twitter’s daily active users, revenue, and societal prominence. Twitter also has an infamously mediocre stock which continues to trade below its IPO price after more than six years on the market. Twitter’s user growth has also been at a plateau for the past three years, but unlike Snapchat, Twitter seems to have accepted this fate and is sticking to its roots, as it rarely implements changes to its platform. If anything, Twitter has Donald Trump (and other important figures, of course, but Trump’s tweets are unavoidable), and they still have never been able to leverage this free publicity to impress investors like Facebook has.

Now, a lot of people believe that all of Snapchat’s users and revenue will eventually get absorbed by Facebook. This view is echoed by one of our faculty members, professor Aswath Damodaran of NYU Stern, who claims “Facebook has taken so much oxygen that everyone else is having trouble breathing” and that Snapchat “needs to find its niche and survive.”¹¹ If Facebook can keep stealing ideas from Snapchat and getting away with it, why would Facebook stop at stories? The only thing they can’t steal at this point is SnapMaps, because this would just be recklessly pretentious amid accusations of spying on users.

Finally, Snapchat has never been perceived as a value investment, and this is the problem that a lot of hot tech startups come to realize when they go public. Snapchat still technically has no real assets aside from its software. It is not a camera company or a photography service, but simply an embellished messenger and social media platform. This, combined with the perception of Snapchat being just another fad that is destined to slowly die out, does not incite confidence for long-term investors.

At the end of the day, though, Facebook will still exist — as will Twitter, Snapchat, Reddit, and other social platforms with massive user bases. People like staying connected, and unless some completely new revolutionary technology comes around to change how people around the world interact, the majority of people will keep their accounts to stay involved with their online communities. Some people will stay and some will leave, as they do, but ultimately, communities will stick around. Time has shown that large social media platforms can subsist through periods of hype and defamation and emerge with their user bases left relatively unscathed. Facebook is a prime example of this. How many times have you seen headlines warning readers of Facebook’s imminent decline? First, it was that young people don’t use Facebook. Next, the Cambridge Analytica scandal broke. Now, pundits hypothesize that people will get tired of social media and will start connecting more in person. How a social media platform chooses to capitalize on its user base is a different story, and this varies greatly from company to company. Facebook has continually found new methods to grow revenue, (not all of them legitimate), whereas Twitter and Snapchat still struggle to figure this out, as their historical stock prices show.

Considering these trends, it makes sense that Snapchat has lost a few million users and has funneled resources towards developing new branches of entertainment which can keep current users engaged. By extension, it makes sense that investors were so apprehensive after another uninspiring earnings report. With the uncertainty of Snapchat’s future trajectory, investors might just be waiting for evidence that the company will continue to grow and not fall into social media irrelevance, or evidence that Snap has found a better way to capitalize on their already-existing user base. □

Work Cited