Last week, all eyes in the tech world were on Snap as the app published its second quarter results. I was one of them, as a 22-year-old founder who has built a company around Snapchat and also owns Snap stock, I was glued to my phone screen waiting for the Bloomberg report.
Overall, most investors were not impressed by the numbers. Despite user growth (up to 173 million this quarter from 166 million last quarter), revenue (up to $182m from $149m from the previous quarter) and average revenue per user being up (up to $1.05 from $0.90) – all showed positive trends, Snap’s shares sell by 17% in after hours trading as investors worried it did not meet the targets set by analysts.
The fundamental reason for this drop in stock, even amidst growth in all areas, comes as a consequence of Snap being constantly compared with Facebook. This article will suggest three reasons why this comparison is misplaced and what this means for Snap going forward.
1. Snapchat was never going to be as big as Facebook and that’s completely fine.
Analysts predict revenue and user numbers based on comparative growth numbers to social networks such as Facebook. The frustration towards Snap for their inability to reach those numbers comes from a massive misconception as to what Snapchat is. On one end, you have Facebook as a utility, I now use Facebook to organise events and keep on top of friend’s birthdays very much the same as anyone under 23-years-old. As a consequence of it being such a utility, it’s accessible to more people – for example, my 55-year-old aunt is a regular user of Facebook.
Snapchat, however, is an entertainment platform for a select group of people – Generation Z. From its unique interface, which lends itself to a generation who grew up with the phone as their first screen and can easily navigate the platform. To its fun and quirky brand, which has encouraged companies such as BBC, Time Warner and NBC Universal to create specific Snapchat optimised shows to reach kids, it’s evident that Snapchat’s competitive advantage is in owning the mindset of Generation Z – the hallowed audience between 13 – 19.
Consequently, measuring user numbers against Facebook or its owned properties is logically fallible, Snapchat should be graded not on user numbers – it’s not a utility like Facebook. Thus, will never stretch across its core segment of young people but rather on whether it has created something its users care about. The simplest measure for this is engagement - and with an impressive 40 minutes spent every day by people under 25 on Snap (consider that each Snap is merely 10 seconds) Snap are winning the engagement wars.
2. Facebook’s copying might have turned out to be good thing for Snapchat
Contrary to expected logic, Facebook attempting to replicate Snapchat with it's Stories across all their owned properties has helped Snapchat. By looking at the data, which holds the viewing habits of millions of users on Snapchat, we noticed an interesting trend two months after Instagram Stories debuted.
While views of people over the age of 25 dropped considerably, as users began to use Instagram Stories, people under the age of 21 started using Snapchat even more.
This data was further supported in Snapchat’s last two earning calls with under 21 year olds spending an average time of over 40 minutes on the app. The narrative is clear, the kids - having seen the oldies leave Snapchat and going on to other platforms, are now investing more and more into the platform. For an audience, which is often considered to be fickle – Snap has created a platform where this audience sticks and this engagement should be incredibly attractive to advertisers.
3. Snapchat don’t have to beat Instagram, they just have to be the best Snap they can be.
Snapchat created the viral hot dog meme, a VR created hot dog which when viewed through Snapchat danced in the real world. Snapchat created Phone Swap, a fun TV dating style show which now been picked up by traditional TV networks. Snapchat, through its introduction of Maps, has enabled people, from the comfort of their own home, to be part of live experiences in locations across the globe.
All of these creations are uniquely Snapchat, with a common theme - each shows an example of Snap creating novel entertainment which speaks to the heart of a younger generation, one that has grown up with their phone as the remote control of their life.
This is the essence of Snapchat and the element they must hone to become a stable and advantageous company. Granted, this idea of creating new modes of entertainment for young people is not as "world changing” as connecting the world a la Facebook. But owning the attention of millions from Generation Z, in highly sought after markets is a strong basis for an incredibly valuable company.
If Snap is to become the category defining company that it expects to be and gets closer to the dizzying heights of their $30bn IPO price, then it must forge deeper and develop increasingly fun relationships with its young audience and start to make good on the recent acquisitions with companies such as Looksery, Bitstrips and Zenly to name a few.
The fact that Snapchat was able to go public at $30bn was the result of slick investment bankers and investors hungry for a tech IPO, particularly due to the lack of any major ones prior to Snap. The market cap at IPO for Snap was thus a result of expertly designed FOMO as opposed to this being Snap’s real value. If one viewed Snapchat, not as a Facebook killer/competitor and rather as the new entertainment platform for Generation Z then it becomes apparent that it has been priced accordingly.
To think that a company showing growth across users, engagement, and revenue is being penalised defies common sense, but such is the case when you’re pegged to the performance of an industry giant.
Indeed, I believe Snap was overvalued when it went public – a more apt number, I would have suggested, is $23bn. Yet, as they make more explicit strides into owning the mindset of Generation Z through innovation, advertisers and investors alike will catch on to just how bright the future of Snap really can be.
Timothy Armoo is the co-founder of Fanbytes.