Snap (NYSE: SNAP) Has The Right Strategy, But Will They Get the Revenue?

Snap (NYSE: SNAP), the camera and social media company that is best known for its Snapchat app reports earnings after the market closes on July 21. The company is not yet profitable, and analysts project the company to deliver negative earnings per share (EPS) of 9 cents.

Right now, earnings aren’t really the issue. It’s revenue. More importantly for Snap, it’s where its revenue is coming from. Like any social media company, Snap garners a hefty percentage of its revenue from advertising. This has worked to Snap’s advantage since it curries favor with Generation Z.

However, until the last month, SNAP stock has not seriously threatened its initial public offering price in 2017. I believe part of that was due to Generation Z serving as a double-edged sword.

Understanding Snap’s Devoted Core User Base

I don’t Snapchat with anyone. And that’s not unusual. According to Omnicore, a digital marketing agency, 73% of Snapchat users in the United States are between the ages of 18 and 24. In fact, 75% of all Snapchat users worldwide are 35 or younger.

As further proof of just how popular Snapchat is, 69% of U.S. teens say they use Snapchat and 41% of those teens say that Snapchat is their preferred social media platform. Additionally, 20% of college students use Snapchat. And as a parent of two college students, I have it on good authority that the real percentage is much, much higher.

And it seems that the app can hold this demographic’s attention for a fair amount of time. Users under the age of 25 average spending 40 minutes per day on Snapchat. That’s more than they use Instagram.

So why is Snapchat so successful when other social media platforms fail. I can think of two reasons. First, Snapchat gives the illusion of privacy. “Snaps” as they’re called will disappear after a certain period of time unless the user saves the post. Not only does this apply to public posts, but it applies to direct messages (DMs) as well.

The second reason is that Snapchat is a popular hangout for teenagers because their parents are not on the app. On the one hand, that’s great for advertisers. On the other hand, Snap is aggressively trying to broaden its base. Why? Because Snapchat knows that if it wants to go to the next level they have to monetize the app. And with a user base that hasn’t changed much since 2016, finding a way to generate meaningful revenue from a teenage demographic can be a challenge.

Snap is Looking to Follow the WeChat Model

The good news is that Snap is aware of the problem they have with its core demographic. However, the solution may come from “minis,” these are lightweight web apps that are housed inside Snapchat. These minis are currently showcased on WeChat – the largest messaging app in China, which is owned by Tencent (OTCMKTS: TCEHY).

Tencent owns 12% of SNAP stock. And it’s had remarkable success with minis. Specifically, mini-apps accounted for $115 million of revenue for WeChat in 2019. And that is with a base of 300 million monthly users.

What makes minis appealing to WeChat and Snapchat is that they focus on collaborative activities, a key attribute of those platforms.

Snap already has a gaming platform called Snap Games which has a user base of 100 million users. And according to Snap, the average user spends 20 minutes a day on the games. That would suggest that the company should be able to profit from minis.

The bottom line on SNAP stock

Whatever happens with the company’s earnings report, Snap’s ability to generate revenue one way or another will be the catalyst that investors are looking for. If it can find a way to monetize the base app, then the stock may have a powerful growth story that will allow it to compete successfully with other social media apps.

But while it does so, it has to be careful that it avoids the existential threat of “aging up.” Competitive platforms such as TikTok continue to pop up and potentially steal users. And if we know anything about Generation Z it’s that they will be brand loyal, until they’re not.