To The Moon

$Snap Inc(SNAP)$

In this article, I'll be sharing an analysis of my thesis on Snap, a company I’ve researched over the past few months and have since made a significant investment in. Let’s dive in.

I won’t spend too much time introducing Snap, as most of you are likely familiar with it. Snap is the parent company behind the Snapchat app, a social media platform primarily used by young adults and teenagers. It competes with TikTok and Meta. Founded in 2011, Snapchat boasts 443 million daily active users and generates $5.17 billion in revenue (LTM). The company’s revenue mainly comes from ads, with a growing contribution from its B2C subscription service, Snapchat+. Additionally, Snap operates a segment dedicated to augmented reality (AR).

The company went public in March 2017 with an IPO valuation of $28.3 billion, reporting $825 million in revenue that year. Today, it has a market cap of $15 billion and is projected to end the year with around $5.3 billion in revenue. Here are the key factors I focus on when analyzing Snap:

User Base

If you’ve read my previous work, particularly my articles on Meta, Pinterest, and other social media companies, you know that the user base is one of the primary metrics I emphasize. For a company like Snap, the user base is a critical indicator of its fundamental health. A social media company’s vitality is reflected in its active user numbers—if users are engaged, advertisers will follow. This was a central argument I made for Meta in 2021-2022 when Meta faced challenges due to the iOS privacy changes, and it remains a key point when evaluating Snap.

Despite the challenges Snap’s stock price has faced over the years, the trend regarding its user base is clear. Snap continues to see steady growth in its daily active users (DAUs) each quarter. While DAUs in the U.S. have remained stable, this isn’t surprising given that there are already 100 million daily active users in the country. The app’s unique appeal to younger demographics continues to drive its growth, with most of the DAU growth now coming from regions outside Europe and the U.S. With a total of 443 million DAUs, Snapchat is among the most widely used apps globally.

What stands out to me is that Snap has managed to grow its DAUs from the end of 2019 to today, despite this period coinciding with the meteoric rise of TikTok. TikTok presents a bigger competitive threat to Snap than Meta, as its key demographic—particularly at the start of this period—overlapped with Snapchat’s: teens and young adults. This growth trend indicates that, while TikTok is widely used by younger audiences, they continue to engage with Snapchat as well, showing that TikTok hasn't fully replaced Snapchat. The shift in usage trends over the past few years reveals that users typically turn to TikTok for entertaining content from unfamiliar creators, while Snapchat is primarily used for connecting and interacting with friends. The lines are becoming increasingly blurred as both platforms expand into each other’s territories—Snap with Spotlight and TikTok through features like Lemon8. While TikTok is gaining popularity among older demographics, it is starting to resemble Meta’s Instagram, as highlighted in this table:

For Snap, it's not just about DAUs but also the time users spend on the app. TikTok has taken a significant share of time spent from Snap, thanks to its addictive short videos and the highly engaging feed. In response, Snap is rolling out a simplified user interface, which is currently being tested by about 10 million users and is expected to be more widely available by Q1 2025. The new interface will streamline the app and place a greater focus on Spotlight, Snapchat's own short video feature. Snap believes this change will enhance user engagement and increase time spent on the app.

This is a pivotal moment for Snap, as increasing focus on short videos could drive more time spent on the app and create additional monetizable ad opportunities. It could even shift user behavior, particularly as uncertainty grows around TikTok’s future in the U.S.

With the new app revamp, it seems that Snap has finally realized they don’t have to be the innovators behind every new format or feature. Instead, they can take a step back and adopt successful strategies from the larger players in the industry.

However, the fact that Snap is still seeing user growth is no secret—every analyst on Wall Street is closely monitoring these metrics. So, why is the company still "in the doghouse," valued at just $20 billion?

Snap’s Challenges and Wall Street’s Current Focus

The issue for Snap isn’t its user base; the problems essentially stem from two key areas:

1. Snapchat struggles with ads (monetization).

2. Snapchat is acting like a larger company than it actually is.

Let’s first dive into the ad problem. The challenges come from several angles. First, Snap’s core demographic—young adults and teenagers—is very specific. The issue here is that teenagers don't have the purchasing power that advertisers typically seek. As a result, Snap’s ad campaigns are often more focused on brand awareness rather than performance. Brand advertising is more vulnerable to macroeconomic conditions. When there is economic uncertainty, advertisers tend to cut brand budgets and shift their focus toward performance ads until the macro environment stabilizes. This trend was particularly noticeable in the past two years, marked by high inflation, rising interest rates, and geopolitical instability.

On the positive side, Snap’s younger audience has its advantages, which the company hasn’t fully capitalized on yet. Young adults spend significant time on these platforms, and their shopping habits are highly conducive to e-commerce, making them an ideal audience for social commerce.

However, Snap’s struggle also lies in its inability to match the AI-powered ad targeting capabilities that larger platforms like Meta and Google have invested in, such as Meta’s Advantage+ and Google’s Performance Max. This lack of investment in advanced AI ad solutions has started to show in Snap's recent performance.

Snap’s Struggles with Monetization and Ego Issues

It’s clear that only the major players like Meta and Google were able to successfully rebound from the 2022-2023 period following the loss of the Apple iOS signal, and their success can largely be attributed to AI. With AI-driven targeting tools, both Meta and Google are improving ad efficiency and driving up ad prices, which has made advertisers more willing to pay a premium for their ads. Snap, on the other hand, still has a long way to go in this area.

Another factor contributing to Snap’s monetization struggles is its inability to match the scale of platforms like TikTok or Meta. Due to this, many advertisers hesitate to invest in Snap, where they can only reach Gen-Z and Millennials, preferring platforms with a broader user base and more diverse demographic segments. Unfortunately, this isn’t a problem Snap can solve in the short term. However, the company should leverage its strength—a younger, highly engaged user base—as an advantage. With $5 billion in revenue, Snap still has plenty of low-hanging fruit it can target to grow successfully before scaling becomes its biggest challenge.

Snap’s Ego Problem

The second major issue Snap faces is a matter of ego. More specifically, the company’s management is acting as if it has the resources and scale of a much larger organization. Snap has been investing heavily in areas like AR, AR smart glasses, and even developing its own operating system—technologies that have some relevance to their core business but have limited impact. For context, Snap’s LTM revenue stands at $5.16 billion, with $1.7 billion allocated to R&D, which is 33% of their total revenue. This was even worse in 2022 and 2023, when Snap spent $2 billion on R&D, or 43.5% of its revenue. In comparison, Meta spends $40.8 billion on R&D (investing heavily in AI and the metaverse), but this only accounts for 26% of its revenue.

The problem for Snap is that much of its R&D budget is directed toward initiatives like AR, filters, and smart glasses—innovations that don’t directly improve their core business. A major issue is that Snap invested heavily in these "innovations" while missing the critical opportunity to improve AI-powered ad targeting, which is central to their business. Yes, Meta and Zuckerberg also invested in the Metaverse, AR, and AI, but Meta’s core products are thriving because they prioritized tools like Advantage+ and other AI-driven solutions first. Many leaders like to think of their companies as tech giants and envision themselves as future conglomerates, but Snap needs to recognize that it is, above all, a social media company. Once they establish their social media business as a reliable cash cow, they can begin to make more ambitious investments in moonshot projects. But Snap isn’t at that point yet, and the sooner they realign their focus on their core strengths, the quicker they’ll have a chance to become the technology conglomerate they aspire to be. A former high-ranking Snap employee who reported directly to management sums this up well.

The issue of thinking you're bigger than you actually are extends beyond just R&D costs. Snap’s entire cost structure needs to be reworked. For instance, they’re spending $1.1 billion on stock-based compensation (SBC), which accounts for over 21% of their revenue. To put this in perspective, Meta’s SBC/revenue ratio is around 10%, despite offering competitive compensation to their employees. Additionally, the revenue per employee metric reveals that, while Snap has made some improvements in this area, it’s still significantly more bloated compared to larger competitors like Meta and Google.

Snap needs to face reality. It’s no longer a $94 billion market cap company, as it was in September 2021, but rather a $20 billion company with limited resources. It can’t afford to make big bets across three different areas; instead, it should—and can—focus on just one. That focus should be on AI and enhancing its monetization and core business. It’s really that simple.

Snapchat+

Snapchat+ is a subscription service offered by Snap that provides users with exclusive features and enhancements not available to free users. These features include the ability to customize the app's icon, see who replays their snaps, and access special filters and effects. Subscribers also enjoy priority customer support and early access to new features in testing.

Priced at $3.99 per month, Snapchat+ launched in June 2022. It was one of the first B2C products in social media, now followed by X (formerly Twitter)'s Premium subscription and Meta Verified.

Snapchat+ has become one of the fastest-growing B2C products, with its growth timeline looking impressive:

• June 2022 – Launch

• August 2022 – 1 million subscribers

• Q1 2023 – 3 million subscribers

• Q4 2023 – 7 million subscribers

• Q2 2024 – 11 million subscribers

• Q3 2024 – 12 million subscribers

Based on these figures, Snapchat+ is generating around $47 million in monthly revenue, resulting in a $500M+ annual run rate. Even considering recent slower growth, it still maintains a +33% growth rate annually. Today, Snapchat+ already accounts for more than 10% of Snap’s total revenue.

Snapchat+ is an excellent product for Snap as it helps mitigate challenges around ad monetization. Additionally, I believe this model will become more important for social media in the future, especially with the rise of AI-generated content and bots. In the future, social media platforms may offer a “human” content feed, with subscriptions distinguishing it from AI-generated feeds. Initially, we’re seeing this phase dominated by influencers and content creators who use subscriptions for better visibility and features, but over time, regular users will adopt it as a status symbol. Eventually, not having a subscription and verification badge may make someone appear like an AI bot.

Snapchat, with its younger demographic, is well-positioned here, as evidenced by the rapid adoption of Snapchat+. Both X and Meta have seen slower subscription growth over the same period as a percentage of their user bases. This aligns with what we discussed earlier: younger users are more tech-savvy, more inclined to try new things, and spend more time online—traits that make Snapchat's demographic an advantage for products like Snapchat+.

So, why might the narrative around Snap change on Wall Street now?

Snap has several potential solutions to its challenges:

Embrace the younger demographic: Snap should focus on its niche market—young adults—and tailor the platform to be more social commerce-friendly. As social commerce and e-commerce gamification rise in the West, largely due to platforms like TikTok Shops and Temu, Snap can tap into this trend. Additionally, shoppable ad formats command much higher CPMs than brand-focused campaigns, which currently dominate Snap.

Snapchat+ growth: As mentioned, Snapchat+ is still in the early stages of B2C revenue streams for social media. With regulatory pressure mounting on Apple and Google regarding App Store fees, Snap stands to benefit as the likelihood of lower fees increases. As Snapchat+ grows and crosses the 10% revenue threshold, it will likely draw more investor attention and could trigger a re-rating of the stock based on a diversified, less cyclical revenue model.

AI & GenAI ad enhancements: Snap needs to invest more in AI-driven ad tools. Meta and Google have greatly improved ad targeting through tools like Advantage+ and Performance Max, and while Snap hasn’t built comparable tools yet, the rise of AI presents an opportunity for Snap to catch up. Even if they are a couple of years behind, they can learn from Meta and Google’s advancements in AI to improve their own ad products.

GenAI agents and chat platforms: Snap can explore GenAI integration in its platform, looking to bigger competitors like Meta for guidance. Snap doesn't need to be the first to innovate—often, copying features that work well for others can lead to success, as seen with Zuckerberg's strategy of adopting successful features and integrating them into Meta’s ecosystem. GenAI could become a major unlock for social media platforms, especially for those like Snap and WhatsApp that are well-suited for AI-driven communications with businesses and creators.

TikTok ban call option: The potential ban or divestiture of TikTok represents an opportunity for Snap. If TikTok faces restrictions in the U.S., Snap could see significant benefits as users and advertisers look for alternative platforms. The outcome of this situation, whether it’s a ban, divestiture, or new deal, could lead to a boost for Snap as it would likely be one of the primary beneficiaries from a shift in user and advertiser migration.

Pressure from stakeholders: As Snap’s stock price remains low, management will feel increasing pressure to address issues like inflated costs, SBC, cash burn on AR, and inefficiencies. Despite Snap’s control by Spiegel through super-voting shares, employees and stakeholders motivated by stock performance will push for changes, similar to how Meta responded to stock price declines in 2022.

AR and smart glasses: The AR market may experience a mainstream breakthrough in 2025. If Snap can stop the cash burn in its AR unit or if the market becomes excited about AR, Snap could see its market cap increase. If Snap decides to sell its AR business, it could receive a positive valuation boost. If the AR space takes off, Snap stands to benefit from its position in the market.

Valuation

Now, let's move on to the valuation, which is a critical aspect of my investment thesis.

For any user-based network, I prefer to value them using a metric I refer to as "market cap per user." The rationale behind this approach is that when evaluating a social network's core fundamentals, the most important factors are the number of users it has and the value it provides to them. This value can be measured in terms of time spent or other relevant metrics.

Conclusion

In conclusion, Snap has multiple opportunities to address its challenges and reshape its narrative on Wall Street. By focusing on core strengths and leaning into emerging trends like AI, social commerce, and subscriptions, Snap can position itself for long-term growth.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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