In the US social networking industry, there are four listed companies. They are the famous Facebook, former US President Trump's favorite information publishing platform Twitter, photo sharing and social networking site Pinterest, and Snapchat, which is popular among young people.
Most of them are between 25 and 55 years old and have used Facebook products more or less. But it is very new to Snapchat. In fact, Snapchat is a powerful challenger for Facebook. The greatest charm lies in rapid growth. In the past year, the stock price has risen from US$20 to more than US$70, and the company is now worth more than US$100 billion.
Snap was founded in 2010 and is headquartered in California. The company's flagship product, Snapchat, is photo sharing and social networking software. The software comes from a "burn after reading" photo-sharing application developed by two students from Stanford University. In April 2011, founder Evan Spiegel introduced the idea of his final plan in a product design class, and it was officially launched in Spiegel's father's bedroom in September 2011. Using the application, users can take pictures, record videos, add text and pictures, and send them to their friends' list on the application. These photos and videos are called "snapshots", in English called "Snap", which is the origin of Snapchat's name.
Snap was listed on the New York Stock Exchange on March 3, 2017, and Tencent announced in November 2017 that it had taken a 10% stake in Snap.
The characteristics of @Snapchat social software are compared with the familiar Facebook and WeChat.
Feature 1: After reading, the system does not retain pictures or information. The feature of early Facebook was to retain all the information. However, many people like Snapchat because of their private preferences. Young people are active in their minds. The changes soon after Snapchat appear to be popular with young people. WeChat does not currently have this function.
Feature 2: Snapchat's software focuses more on the phone's camera, making shooting, uploading, and sharing photos the core of the entire application. Photos are now commonplace, and in the past few years, social networks were mainly text-based, supplemented by photos and videos, Snap positioned itself as a camera company. WeChat Moments and Official Accounts have been around for so many years, and they are still based on text. Therefore, Snapchat does not have a target company in China. Only 9 photos of WeChat Moments can be posted, and there are no features such as beauty and filters. WeChat videos are small videos of only about 15 seconds, and there are many restrictions on sharing videos. Snapchat focused on photos and videos early on and used a lot of technologies such as augmented reality to beautify pictures and videos.
Feature 3: Snapchat users are very young. Young Snapchat users often describe Facebook as the social platform of their parent's generation. A considerable part of Snapchat users in middle school and university students. Snapchat still has competitors, and Snapchat's target in the US is Facebook's Instagram. Founded in 2010, Instagram is also a photo and video sharing platform. Instagram was acquired by Facebook in 2012 for only 1 billion US dollars. It is one of Facebook's most successful and proud acquisitions. Now that this acquisition is too cost-effective, if Instagram is currently listed on its own, in fact, the market value should be higher than Snap. Instagram has been operating independently under the Facebook Group, and its commercialization has just begun.
Someone wants to ask, what is the difference between Snapchat and Instagram?
There used to be, but now the difference is very small. As an investor, it can be ignored because the interface design and business model of social network software are not protected by patents. The function of Instagram to copy Snapchat is too easy. For example, Instagram has a "Story" button in the most prominent place. You can upload the latest photos and videos and disappear within 24 hours. This feature is actually learned from Snapchat. Looking at the user situation, they are all facing young people, and the user groups are highly overlapped. 59% of Instagram users are between 18 and 29 years old, and 77% of Snapchat users are between 18 and 24 years old. 75% of Americans between the ages of 13 and 34 use Snapchat.
Comparing these two platforms, the most important indicator is active users, and the information in this area is not very straightforward. TechCrunch statistics show that Instagram reached 1 billion monthly active users as early as 2018. According to the Backlinko website, Instagram has 500 million daily active users. In the latest financial report, Snapchat's daily active users reached 290 million. Therefore, the penetration rate of Instagram is approximately twice that of Snapchat.
After talking about the competitive landscape of social networks, let's take a look at Snap's financial performance in conjunction with the latest quarterly report.
First, Snap has achieved rapid growth in the past three years. From 2018 to 2020, the annualized revenue growth was 46%, the latest second-quarter revenue growth was 116%, and the revenue growth in the past 6 months was 91%.
Second, the annualized revenue growth per user was 27%, and the gross profit margin was 35% in 2018, 49% in 2019, and 54% in 2020.
Third, the number of daily active users in the latest second quarter was 290 million, a year-on-year increase of 23%. The functions of Snapchat and Instagram are highly overlapping, and users also highly overlap the two platforms. Even with fierce competition, Snapchat still has many growth opportunities.
Next, let's take a look at the growth opportunities for Snapchat.
First, growth opportunities in the North American market. According to Snap’s financial report, Facebook’s revenue per user contribution is $233, while Snapchat's is only $22. Therefore, the commercialization potential of the Snapchat platform is still very large.
Second, half of US smartphone users are Snapchat users. But Snapchat currently only occupies 2% of the digital advertising market share in the United States. Therefore, the potential of Snapchat's digital advertising is still great.
Third, in half of the world's digital advertising market, these markets are basically markets in developed countries. Snapchat has penetrated into 70% of 13-34-year-olds in these markets. As the wealth of these young people grows, their commercial value will also increase.
Fourth, the US digital advertising market is expected to grow at an annualized rate of 14.3% from 2020 to 2024. The annual growth rate of digital advertising in the international market is 11%. Digital advertising is a fast-growing industry. You can see how attractive the digital advertising market is by looking at the revenue performance of Google Search, Youtube, and Facebook in these quarters.
Fifth, Snapchat's specialty is augmented reality or AR. You can bring well-known sunglasses to your photo, you can put Dior brand shoes on the feet of your photo, and you can change the wristwatch of your photo to Piaget brand. Snapchat has launched its own AR glasses. Metaverse, that is, Metaverse Snapchat was originally a camera company. In the future, it will find many opportunities in Metaverse Social. Snapchat is an important meta-universe stock.
Sixth, there are many opportunities for Snap e-commerce. Now that the technology has matured, the decentralization of e-commerce has become a trend, which is why Shopify has developed greatly. In China, Douyin and Kuaishou have already started e-commerce, while WeChat mini-programs have provided Pinduoduo, Meituan, and JD.com with a traffic portal. The United States is a bit slower, but the trend of social and e-commerce is already very obvious. Facebook has been exploring Facebook to open stores, and Snapchat is also in social and e-commerce. There are many opportunities in this area. This provides its platform with an opportunity to monetize beyond digital advertising.
After talking about what Snapchat does, what are its characteristics, and who are its competitors. Finally, we talk about how to invest in Snap stocks.
I know that investors are most concerned about the valuation of Snap. Snap targets Facebook, Twitter, and other media companies. Pinterest is more a photo-sharing website, with a weaker social component, and its current market value is only 36 billion US dollars, and it is not a target company for Snapchat's valuation. Next, we will compare Snap and Facebook in detail, and find some opportunities. Snap has increased by 47% from the beginning of the year to now, and Facebook has increased by 39%. Looking back at 1 year, Snap has risen by 228%, and Facebook has risen by 27%.
Facebook's valuation is basically the lowest among the large US technology stocks. There are two main reasons: One is that Facebook makes money purely on advertising, so the imagination is smaller. The second is that social companies are prone to privacy issues, which have become the focus of attention of the entire society, and there is much negative news. Therefore, Facebook has been underestimated by the market for a long time. The current market value of Snap is one-ninth of Facebook, and revenue is only one-thirtieth of Facebook. And Snap hasn't made a profit yet, and Facebook has already made a lot of money. The price-earnings ratio is not suitable for the comparison of the two companies. To compare valuations, it’s best to look at the market-sales ratio. We don’t use the full-year price here. Here we divide the market value by their latest second-quarter sales.
Both companies rely on digital advertising to make money, and their business models are exactly the same, so their market-to-sales ratios are very comparable. Facebook's market-to-sales ratio is 36 times, while Snap's market-to-sales ratio is 118 times. In this way, Snap's market-to-sales rate is much higher than that of Facebook. Of course, Snapchat's advantage is also very obvious. This is the growth rate. Regardless of active user growth, revenue growth, or revenue growth per user, Snapchat is much faster.
Tell me about my point of view.
Snapchat looks a bit overestimated by current indicators, but considering that Facebook is underestimated by the market and Snap's development prospects, Snap is still in a relatively reasonable price range. If you are a relatively conservative investor, long-term investment in Facebook is the safest, to hold the market leader, simple and rude, and the chance of making mistakes is very small. If you can take certain risks and believe in the story of Snapchat's growth, I think you can also buy Snap appropriately, but it is very difficult and unnecessary to control the position of Snap accurately. The most difficult part is how to estimate its future growth rate and growth space. I think investors must pay close attention to its active user growth, revenue growth, and the growth of each user's revenue. However, I am confident that several indicators will maintain rapid growth because the two industries of social networking and digital advertising are both sunrise industries. If you missed AMD a few years ago, it’s best not to miss Snap this time. AMD is also taking the next step in Intel’s shadow to seize the opportunity to gain more market share. Snap still has the opportunity to emerge in the shadow of Facebook. In the social network, although Facebook dominates, young people like to be different, so Snap always has a chance.
The current anti-monopoly situation is very beneficial to Snap. In the past, Facebook’s acquisition of Instagram and Wahtsapp caused a high degree of monopoly in the social network industry. The US regulators have regretted it, but it is too late. In the future, the US regulators will definitely supervise Facebook to prevent abuse. Because of Snap's excessive suppression. Regulators are willing to see competition in the social networking industry, so they will deliberately support the development of Snap. Therefore, I believe that both social networks and digital advertising markets are large enough to accommodate the growth of Facebook and Snap. Therefore, if you are optimistic about both companies, it is good to hold both companies at the same time, and there should be good returns in the long run.
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