3 Things About Snap That Smart Investors Know

Snap is one of the most popular social media apps with over 300 million daily active users.

Snap is one of the most popular social media apps with over 300 million daily active users.

Savvy investors in Snap ( SNAP -4.30% ) may not know every detail about the company, but they know at least these three things: Snap is home to hundreds of millions of daily active users globally. The vast majority of those users are in an age group coveted by marketers. And finally, smart investors know that Snap is facing headwinds from privacy changes that Apple ( AAPL -3.00% ) made to its IOS. 

Keep reading for a detailed look into each of the items mentioned above and insight into which of those factors is playing the most prominent role in influencing the stock price lately. 

Two people looking at a phone.

Image source: Getty Images.

1. 319 million daily active users and growing 

Snap boasts 319 million daily active users (DAU) as of Dec. 31. That was up significantly from the 265 million it had the same time in the prior year. Like other social media apps, Snap is free to use. But that shouldn’t take away from the impressive feat of attracting over 300 million DAU. Today’s consumers have a wide variety of free entertainment options.

Since its service is free to customers, it raises the question of how the company makes money. Snap relies mainly on showing advertisements to users browsing the app. Therefore, it is interested in keeping users coming back and staying longer on each visit. Further, marketers are more interested in gaining the attention of buyers with more considerable purchasing power. For Snap, that means users from North America are its most lucrative as they generate the highest average revenue per user (ARPU) — $9.58 — vs. ARPU of $4.06 overall.

2. A younger audience coveted by advertisers

Notably, 90% of Snap’s user base is between 13 and 24 years old in developed markets, and 75% are between 13 and 34. Marketers’ primary objective is to get consumers to purchase products or services. A step above that is to gain a loyal customer for life. The latter provides a better lifetime value and justifies a higher upfront investment to win them. For that reason, younger consumers are highly coveted by advertisers.

These individuals are approaching major life choices like buying their first car, getting married, buying their first home, developing brand loyalty, and starting a career. Real estate agencies, car companies, and employment agencies would love to influence all of the decisions above. This is in stark contrast to older demographics, which have already established habits. Even if a brand can steal a customer from a competitor, there is less time to benefit from that older consumer’s spending.

SNAP Revenue (Annual) Chart

SNAP Revenue (Annual) data by YCharts

The younger user base has undoubtedly helped Snap’s revenue explode from $404 million in 2016 to $4.1 billion in 2021.

3. Apple’s privacy changes are creating headwinds for Snap 

In the last year, Apple has implemented changes to its IOS that make it more challenging to track users on its electronic devices. Snap — and other social media companies, for that matter — relies on these tracking capabilities to deliver targeted advertising to users. Marketers value precision advertising because it removes waste and provides a higher return on investment. 

Snap management is working proactively to mitigate the headwinds that the changes have created and is making good progress. However, management also noted that the adjustments would take several quarters until advertisers feel comfortable.

SNAP Chart

SNAP data by YCharts

Overall, this last fact about Snap is the one that’s impacting the stock price most significantly. Investors worry advertisers will pull back spending because of the potentially lower returns on investment the changes will cause. It’s too early to tell if management’s adjustments will effectively work around Apple’s changes and assuage concerns of lower ROI. An increase in risk works inversely to a company’s valuation, and Snap has been no exception. 

Those are three things that smart investors should know about Snap today.

Read this article on Motley Fool

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