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3 New Tailwinds for Snap's Stock

Leo Sun, The Motley Fool

Snap's (NYSE: SNAP) stock doubled this year as the company gained Snapchat users again, grew its average revenue per user, narrowed its losses, and expanded its ecosystem. Those improvements allayed fears that Facebook's (NASDAQ: FB) Instagram would eventually render Snap's smaller social network obsolete.

Back in late April, I examined several fresh catalysts for Snap -- including in-app games, new platforms for developers, its Audience Network for ads on third-party apps, and Snap Originals. Today, I'll discuss three additional tailwinds that could strengthen its business.

A young woman records herself dancing with an umbrella.

Image source: Getty Images.

1. Widening its moat against TikTok

ByteDance's lip-syncing short video app TikTok has over 500 million monthly active users (MAUs) worldwide. Many companies developed similar short video apps -- like Facebook's Lasso, Instagram's IGTV, Baidu's Haokan, and Tencent's Hotpot Video -- to widen their moats against that red-hot app.

Snap is planning to follow suit by letting users add more licensed music to their videos, according to The Wall Street Journal. Snap previously licensed songs on an individual basis, but it's reportedly now in talks to acquire broader licensing rights from Vivendi's Universal Music Group, Sony Music Entertainment, and Access Industries' Warner Music Group.

Snapchat and TikTok share a similar strength: Both apps are more popular with Gen Z users than older generations. Piper Jaffray's latest "Taking Stock with Teens" survey found that 41% of U.S. teens still ranked Snapchat as their favorite social network, compared to 35% for Instagram.

Based on TikTok's success with teens, launching lip-syncing short videos on Snapchat could help Snap lock in users, widen its moat, and boost its average revenue per user. However, higher music royalties could cause Snap's operating expenses to rise and reverse its bottom-line improvements.

A young woman wears headphones connected to her smartphone.

Image source: Getty Images.

2. The death of Instagram Direct

In late 2017, Instagram introduced Instagram Direct, a Snapchat-like app that split its direct messages into a stand-alone app. Direct seemed like a major threat to Snapchat, but it was only tested in a handful of markets without any promotional support.

Sensor Tower claims that the app was installed about 1.35 million times on the App Store and Google Play, but that's a tiny figure compared to Instagram Stories' 500 million daily active users (DAUs) and Snapchat's 190 million DAUs. The departures of Instagram's founders and the assignment of three Facebook veterans to fill those voids also cast doubt over the future of stand-alone apps like Direct.

That's why it wasn't surprising when Instagram recently discontinued Direct. It will retain direct messages in Instagram, but its stand-alone play against Snapchat is now dead -- which is great news for Snap.

3. A new deal with Shopify

In late April, Snap partnered with e-commerce services provider Shopify (NYSE: SHOP) to simplify ad buys for smaller businesses. The new feature lets merchants directly buy and manage Snapchat Story ad campaigns on Shopify -- a feature that was previously reserved for Facebook and Google's bigger ad platforms.

Working with Shopify's 820,000 merchants could boost Snap's advertising revenue, which could still rise 24% this year and 21% next year, according to eMarketer. It could also ensure that Snap's annual ARPU (average revenue per user) growth remains in the 30% to 40% range and continues offsetting its slower growth in DAUs.

Growth (YOY)

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

DAUs

15%

8%

5%

0%

(1%)

ARPU

34%

34%

37%

37%

39%

Data source: Snap quarterly reports. YOY = year over year. 

But mind the risks...

Snap's core business improved significantly over the past year, but the stock still isn't cheap, at 10 times this year's sales, and it could still run out of cash before it generates a profit.

Snap still isn't an ideal investment for queasy investors, but its prospects could brighten significantly if some of these tailwinds evolve into long-term growth engines.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Baidu, Facebook, and Tencent Holdings. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Baidu, Facebook, Shopify, and Tencent Holdings. The Motley Fool recommends Vivendi SA. The Motley Fool has a disclosure policy.