Snap in late 2018 / early 2019 reminded me of this scene from Shark Tale with Will Smith. On the food chain of companies to invest in, Snap was below whale poop. Nobody would touch it, unless they were looking to short the stock. People would consistently make fun of Snap for thinking people would buy their Spectacles product. Snap made a very sticky app popular among young people that they couldn’t properly monetize. They were also burning cash with no outlook to turning it around.
They IPO’d in 2017 with a valuation of around $28B, making it as large as Target and Marriott at the time. Their valuation steadily declined and bottomed out below $10B in late 2018. Now, Snap has a market cap of over $107B. Can you believe that? It is now the 82nd largest US company and has similar valuations to AMD, Zoom, and Square. These three companies have been darlings of the stock market over the last several years and Snap has quietly risen with them. If you invested at the bottom in late 2018, you would have over a 1,200% return on your investment. Year to date Snap is up 38% outpacing the 17% return for the S&P 500.
So where has this growth come from? The board of directors has stayed fairly constant. Compared to 2019, two additional seats were added and one person left the board. Even though the board stayed constant, there were a couple of new hires to the executive team in May 2019 that have stuck. They brought in a new CFO, a chief marketing officer, a chief business officer, and a chief communications officer.
Comparing Q1 2019 to Q1 2021, two of their most important metrics have seen exception growth – revenue and daily active users (DAU). Their quarterly revenue increased from $320M to $770M and DAU from 190M to 280M. Going one step deeper, their revenue increase has been spread fairly consistently across the world, but their user growth has come from the “rest of the world” category. Out of the 90 more million daily active users, 61 million came from the “rest of the world”. Due to their growth outside of the US, Q1 2021 marks the first time more people use Snapchat on Android compared to iOS.
Q1 2019
Q1 2021
Q1 2019
Q1 2021
Snap generates its revenue primarily through advertising. Snap has Snap Ads and AR Ads. AR ads are where sponsored filters and lens revenue is recognized. They also have revenue from hardware sales, but it is immaterial compared to their advertising revenue.
From the earnings call in April 2021, Jeremi Ann Gorman, the Chief Business Officer, provided some useful insights on the general health of the business. She said the active advertiser base had doubled YoY. She also called out how they are planning on replicating successful sales strategies in North America:
“North America represents our largest revenue base, and it’s also our fastest growing. We doubled down on our investments in sales and sales support in North America over the past 18 months, and we’ve observed higher growth in this region in recent quarters. We see a lot of opportunity to repeat this effort outside of North America in order to accelerate our growth internationally.”
She also highlights how AR advertising will be a growth mechanism for the business. “One of our goals is to combine AR experiences like fit and try-on with personalization and customers’ preferences to vastly improve the shopping experience while driving purchases and reducing returns.” She talks about an ad campaign by Dior where Snapchat users could try on sneakers via AR technology. This led to 6.2x return on ad spend for Dior.
YoY comparison will need to have a healthy respect due to the impact of COVID, but Snap is looking for a strong year due the money committed so far for 2021 is more than 50% of all upfront commitments made in 2020.
In summary, Snap has been able to continue to attract users to their platform, specifically outside of North America. They also offer a unique ability to advertise to their users by using AR filters, which is an experience that not many other places can replicate. They are still not profitable, but they broke the threshold to becoming free cash flow positive in Q1 2021.
Peace and Love.