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Snapchat is Moving in the Right Direction

Social media is a fast-growing industry.

Statista predicts the number of social media users to reach 4.41 billion by 2025, as many populous countries, such as India, are investing in IT infrastructure.

Last year, social media saw significant changes driven by technological advancements and changing consumer behavior. Some new trends in social platforms are the incorporation of innovative advertising, e-commerce, and immersive experiences.

The biggest social media companies generate the bulk of their revenue from advertising, and Snapchat, owned by Snap (SNAP), has only recently begun to incorporate advertising into its platform.

Snapchat’s main competitors such as Instagram Reels owned by Meta Platforms (FB), TikTok, and Pinterest (PINS) have already begun monetizing short-form video content, and are now focused on generating revenue from other sources such as e-commerce and digital payments.

As the stock market continues its wild ride this year, the social media sector has taken a massive hit. Snap stock is down 51% this year, although the company is making much-needed changes to its business strategy. I am bullish on the company, given that Snap is inching closer to profitability.   

Impressive Revenue and User Growth

SNAP stock earnings fell short of Wall Street’s expectations, but revenue increased 38% year-over-year to $1.06 billion in the first quarter.

The company also fell short of its target of 44% growth because many advertisers paused their campaigns after Russia invaded Ukraine on February 24.

Although most advertisers resumed their campaigns within 10 days, the disruption hurt the company’s quarterly revenue, with year-over-year growth remaining below pre-invasion levels at around 32% from February 24 to the end of Q1.

Apple’s major iOS privacy update, which gave users the option to opt out of off-app tracking, had an impact on Snap’s ad business as well. While the company tries to figure out how to deal with this challenge, Snap continues to experiment.

Advertisements have always been a significant source of revenue for social media platforms, so investing in expanding ad-supported features makes sense as a way for the company to generate additional revenue.

Last year, Snapchat paid $250 million to 12,000 creators through Spotlight. Although Spotlight is still in its early stages of development, it has received positive feedback from users, with total time spent increasing by more than 230% in Q1. In comparison to the first quarter of last year, the number of Spotlight submissions using creative tools, or Lenses, increased by 350% in Q1 2022.

Snapchat Discover, the news feed feature introduced by the company, is seeing stellar growth with total daily time spent by users aged 25 and older increasing more than 25% in the first quarter.

Six Snapchat Discover partners attracted more than 100 million global viewers as well, and the number of daily active users increased 18% to 332 million.

For a long time, social platforms like Snapchat and Instagram remained ad-free, and most users preferred it that way.

In addition, when compared to the YouTube partner program, the percentage of revenue shared with creators who produce engaging user experiences on Snapchat is low, which is proving to be a challenge to attract content creators.

Because YouTube has always been ad-dependent, the platform is the preferred social media channel among the majority of high-quality creators. For Snapchat to thrive, the company will have to survive the threat posed by YouTube and other competitors.

Strategies to Drive Engagement Higher

Snap is banking big on Augmented Reality experiences as it works to establish itself as a critical platform for new forms of entertainment.

According to the company, 250 million users use AR features regularly, accounting for a significant portion of its overall 332 million DAUs. Snap’s community has also built over 2.5 million Lenses through its Lens Studio, with users playing with Lenses created by Snap’s community more than twice as often in Q1 2022 in comparison to Q1 2021.

The expanding AR features will help Snap grow its creative tools as well as the community to stay on top of the latest trends. Snap’s focus on AR will also help the company progress into the next chapter of social networking, and keep up with the industry’s biggest players.

Snap has partnered with Bitmoji to introduce AR avatars, and the company plans to invest in bringing new 3D Lenses to keep active users engaged with the platform.

The company recently updated its Augmented Reality buying experience, as well as community-generated Augmented Reality experiences for local landmarks.

On April 18, Snap announced a digital art series in collaboration with the Los Angeles County Museum of Art, which includes three new AR monuments available to Snapchat users.

This initiative aims to encourage more designers to experiment with Snapchat tools, giving users more reasons to use the platform.

Takeaway

Snap continues to deepen the content experience on Snapchat with Spotlight and new tools, and the company is also testing features that will allow creators to earn a higher revenue share from ads.

With the number of Internet users continuing to grow, the company has plenty of room to grow in terms of user growth, and there is reason to believe Snap will reach profitability soon aided by higher monetization levels.

The recent pullback in the stock price, therefore, seems to present growth investors with a good opportunity to consider SNAP stock.

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