Snap surprises with jump in revenue and user growth

Our portfolio stock Snap triggered a share price jump of around 24 percent with its second-quarter figures, raising the valuation to around 120 billion dollars. This means that the share price has already risen by 250 percent over the course of the year.

The reason for the leap of joy on the stock exchange was a 116 percent jump in sales to 982 million dollars and a 23 percent increase in users to 293 million. Both figures were well above expectations. The falling loss was also received positively, amounting to only $193 million, compared with $326 million in the same period last year. Revenue was therefore not simply "bought in" but generated from the business model.

In addition, Snap CEO Evan Spiegel nurtured hopes that the phase of start-up losses typical for platforms would soon come to an end. Adjusted EBITDA was $117 million, representing - on that basis - the third profitable quarter in the past 12 months, Spiegel told the analyst conference. The figure demonstrates the leverage of its scalable business, he said.

Snap is an experience/creator platform that thrives on the content of its users. "More than 200 million Snapchatters engage with augmented reality on average every day, and over 200,000 Creators use Lens Studio to create AR Lenses for our community. This quarter saw the launch of our Cartoon 3D Style Lens, which uses machine learning to transform people into a 3D animated cartoon in real time. In its first week of release, it generated 2.8 billion impressions on Snapchat alone," Spiegel said. Snap leverages the creativity of its users to constantly present new content.

The camera technology, especially augmented reality, is also expected to boost e-commerce. Users can view similar styles on the photos and buy them directly. This development is still in its infancy, but is seen as a long-term investment to supplement the revenue streams, which today are largely based on advertising, with participations in the sales of retail partners.

Photo: Snap

Snap is making its camera technology available to other camera manufacturers as a software development kit (SDK) so that Snapchat features can be more widely adopted. 

As guidance for the third quarter, Snap put out the prospect of 58-60 percent growth. Uncertainty is caused by the renewed spread of Corona infections and Apple's new tracking regulations. Since the end of the second quarter, the iPhone manufacturer has had all users explicitly agree whether app developers can track their users' behavior. This is an important tool for advertisers to target their ads. With many users refusing to give this consent, advertising prices on Apple devices have plummeted and advertisers have shifted budgets to Android. Snap is also bracing for declines in advertising on Apple devices. However, the user response so far has not been as strong as expected, so the impact on the advertising business will be delayed. However, the effects are not yet clearly foreseeable.

Snap stock (1 year)

Why Snap is a modern platform:

Snapchat's business model is based on a multi-sided platform that is entirely based on a camera app for smartphones. For this reason, the company, now called Snap Inc, now refers to itself as a "camera company."

Snapchat is an ecosystem and prosumer social networking platform that allows people to connect with each other by sharing experiences, filters, photos or videos, and chatting to increase network effects. Platform interactions are tightly integrated with curated services such as Camera, Lenses or Filter. This puts the company in competition with major players such as WhatsApp, Facebook, Twitter or Instagram.

Snap is free to download and all of its features are also free, such as creating Snaps, conversing with family and friends, and finding friends' Stories in the Discover feature. These features are meant to drive user engagement, which in turn helps attract advertisers and increase ad revenue, which includes Snap Ads and Augmented Reality (AR) Ads. Spectacles are glasses that connect to the Snapchat app and allow users to take Snaps and record videos.  

Snap Ads provides advertisers with a way to tell stories similar to the way Snap users do, while offering additional features such as long-form videos and the ability for users to visit an advertiser's website or install an advertiser's app. AR Ads includes Sponsored Lenses or Sponsored Filters. The former provide users with branded augmented reality experiences. The latter offer fun, artistic overlays that allow users to interact with an advertiser's brand. 

From the ecosystem, new filters and extensions are additionally implemented, which in turn are offered to the demand side, again leading to the appeal of using the core services (camera app) as well as the social network. The curated technology is based on the Camera, Lenses, Filters, Social Communication, Snap Map (Location Based Stories), Stories (Short Video Messages), Spotlights (Short Videos), Snap Ads (Advertising Modules) Snap Originals (Short Message) and Scans (Scan and Story Details) which enable people to communicate through short videos and images. 

The platform is designed to drive interactions on all sides of the market to attract advertisers to Snap Ads and Sponsored Creative Tools. According to Snap, advertisers can reach a daily audience of 293 million users on Snapchat, who spend an average of 30 minutes per day on the platform. Snap does not have individual business segments that it reports in its financials. Essentially all of Snap's revenue is generated by advertising, which accounted for 99% of the company's total revenue of $2.5 billion in 2020. The company says it also generates a small and "non-significant" portion of revenue through Spectacles, the company's only physical product.

Snap also has a smart inverse strategy that uses SnapKit and Snap's Rest API to develop innovations, features and services from the outside in, generating further network effects on the platform and ecosystem. 

Since its inception, the platform has relied on the trend of experience and creator platform economy, in which the valuable content and sharing of experiences are becoming more and more in focus.

The author and/or related persons or companies may own the shares mentioned herein or are already invested in these shares, e.g. via an investment vehicle. This article is for general information purposes only and constitutes a free expression of opinion and not investment advice. Please also note the detailed legal information.

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