To The Moon

$Snap Inc(SNAP)$

In this article, I’ll be sharing my thesis on a company I’ve been accumulating over the past few months—one that has now become a significant position in my portfolio. That company is Snap. Let’s dive in.

Introduction

I won’t spend too much time introducing Snap, as most of you are already familiar with it. Snap is a social media company that operates the Snapchat app, which primarily attracts young adults and teens. It competes with platforms like TikTok and Meta and was founded in 2011.

Snapchat currently boasts 443 million daily active users and generates $5.17 billion in revenue (LTM). While the majority of its revenue comes from advertising, the company is also expanding its B2C revenue stream through Snapchat+, its subscription service. Additionally, Snap has its own augmented reality (AR) business segment.

The company went public in March 2017 at a valuation of $28.3 billion, generating $825 million in revenue that year. Since then, its stock has experienced significant volatility. Today, Snap trades at a $20 billion market cap and is expected to close the year with approximately $5.3 billion in revenue.

Key Factors in My Analysis

User Base

If you’ve followed my work—especially my articles on Meta, Pinterest, and other social media companies—you’ll know that one of the most important metrics I focus on is the user base. For a company like Snap, the user base is a critical indicator of its fundamental strength.

A social media platform’s success is largely measured by its active users. If the users are there, advertisers will follow. This was a core part of my investment thesis for Meta in 2021-2022 when the company faced headwinds from iOS privacy changes, and it remains a key consideration in my analysis of Snap.

Despite the challenges the stock price has faced over the years, the growth trend in Snap’s user base remains clear. The company continues to see an increase in daily active users (DAUs) every quarter. While DAUs in the U.S. have remained steady, this isn't surprising given that Snap has around 100 million DAUs in the country. The app's unique appeal to younger audiences contributes to this. Currently, Snap’s DAU growth is primarily coming from regions outside the U.S. and Europe. With a total of 443 million DAUs, Snapchat is also one of the most widely used apps globally.

What impresses me most is that from the end of 2019 to today, Snap has managed to grow its DAUs despite the rapid rise and explosive growth of TikTok during this period. TikTok is a bigger competitor to Snap than Meta because its core demographic—at least during the earlier part of this period—is very similar to Snapchat’s: teens and young adults. This trend shows that while young adults and teens may use TikTok, they continue to use Snapchat as well. TikTok has not fully replaced Snapchat. The usage pattern that has emerged in recent years indicates that people primarily turn to TikTok for entertainment from strangers, while Snapchat is used to connect and interact with friends.

Of course, the lines between the two platforms are blurring, as both companies are expanding into each other's territories. Snap has launched Spotlight, while TikTok is introducing features like Lemon8 and others within the app. While TikTok has gained popularity with older demographics, it’s increasingly resembling Meta’s Instagram, as shown in the following table:

For Snap, it’s not just about daily active users (DAUs)—time spent on the app is equally important. TikTok has captured a significant share of time that users previously spent on Snap, thanks to its highly addictive short videos and its feed’s emphasis on them. However, Snap seems to have found a response. The company is rolling out a simplified user interface, which is expected to be more widely available by Q1 2025. Currently, around 10 million users are already experiencing it. This new design aims to streamline the app and spotlight Snapchat’s short video format, Spotlight. Snap believes this will help boost user engagement and increase time spent on the platform.

This is a crucial moment for Snap. If it can successfully prioritize short videos, it stands to gain more time spent and monetizable ad space. Additionally, as uncertainty about TikTok's future in the U.S. lingers, there could be a potential shift in user behavior toward Snap.

With the new app revamp, it seems Snap has finally recognized that they don’t need to be the pioneers of every new format or feature. Instead, they can take a step back and adopt successful strategies from the major players in the market.

That said, the fact that Snap is still growing its user base is no secret—any Wall Street analyst is closely monitoring these metrics. So, the real question is: 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 core problems stem from two main factors:

• Snapchat struggles with monetization.

• Snapchat is behaving like a larger company than it actually is.

Let’s first address the monetization issue. The problem can be traced to several factors. First, the younger demographic—teens and young adults—while valuable, presents a challenge. Teenagers, in particular, lack the purchasing power that advertisers seek. As a result, many campaigns on Snap focus more on brand awareness rather than performance. Brand advertising is more vulnerable to macroeconomic shifts, and during periods of uncertainty, such as the last two years marked by high inflation, rising interest rates, and global instability, advertisers tend to cut back on these budgets, favoring performance-driven ads until the macro situation stabilizes.

On the flip side, there are also advantages to having a young user base, although Snap hasn’t fully capitalized on them yet. Young adults spend a significant amount of time on platforms like Snap, and their shopping habits are highly e-commerce-oriented, making them an ideal audience for social commerce.

However, Snap’s failure to invest heavily in AI-driven ad targeting solutions, unlike Meta and Google (with their Advantage+ and Performance Max tools), is now taking its toll, particularly in recent quarters.

It’s clear that only the major players like Meta and Google were able to recover successfully from the 2022-2023 period following Apple’s iOS signal loss, and that success is largely attributed to AI. With the help of advanced AI targeting tools, Meta and Google have been able to increase their ad pricing by becoming more efficient, which has led advertisers to pay higher rates for their ads. Snap, on the other hand, is still on the path to adopting similar solutions.

Another issue contributing to Snap’s low ad monetization is its lack of scale compared to TikTok and Meta. As a result, many advertisers are hesitant to invest in a platform where they can only reach Gen-Z and Millennials, preferring instead to advertise on platforms with a broader user base and more varied demographics. This is a challenge Snap won’t be able to overcome in the short term. However, by focusing on their strengths—namely, their younger, highly engaged audience—Snap can still leverage this demographic as a competitive advantage. With $5 billion in revenue, there are still plenty of growth opportunities for Snap before scale becomes a more significant challenge.

Snap’s Ego Problem

The second issue I see with Snap is their ego. More specifically, the company and its management are acting as if they’re a much larger organization with far more resources than they actually have. Snap is investing heavily in areas like AR, AR smart glasses, their own operating system, and other technologies. While these innovations may impact their business, the effect is limited. With LTM revenue of $5.16 billion, Snap spends $1.7 billion on R&D—33% of their total revenue. This was even higher in 2022 and 2023, when they allocated $2 billion annually, or 43.5% of their revenue, to R&D. By comparison, Meta spends $40.8 billion on R&D (heavily focused on AI and the metaverse), which accounts for 26% of their revenue.

The issue for Snap is that much of that $1.7 billion is being poured into areas that don’t directly improve their core business. For example, spending heavily on AR, filters, and smart glasses is fine, but they've missed the opportunity to invest in AI targeting, which is central to their business. Yes, Meta and Zuckerberg are also investing in AR and AI, but their core products are thriving because they’ve first invested in tools like Advantage+ to strengthen their advertising offerings. While many company leaders like to envision their firms as technology giants or conglomerates, Snap needs to recognize that they are, above all, a social media platform. Once they successfully turn that side of the business into a reliable cash generator, they can begin focusing more heavily on moonshot projects. But Snap is not yet in that position, and the sooner they accept this and realign their focus on their core business, the faster they’ll have a shot at growing into a true technology conglomerate.

This mindset of overestimating their size isn’t just evident in R&D spending—it extends across the company’s entire cost structure. Snap is spending $1.1 billion on stock-based compensation (SBC), which makes up over 21% of their revenue. For comparison, Meta’s SBC-to-revenue ratio is about 10%, despite paying its employees generously. Additionally, while Snap has started improving its revenue per employee, it remains significantly more bloated compared to larger competitors like Meta and Google.

Snap needs to face reality. It’s no longer the $94 billion market cap company it was in September 2021. Today, it’s a $20 billion company with limited resources. It can't afford to spread itself thin across three different areas. Instead, it should focus on one key priority: AI and enhancing its monetization and core business. It’s really that simple.

Snapchat+

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

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

Snapchat+ has become one of the fastest-growing B2C products out there, with its growth timeline showing impressive results:

• 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

With these numbers, Snapchat+ is generating around $47 million in monthly revenue, placing it on a trajectory of over $500 million annually. Even during the slowest growth quarters, Snapchat+ is still growing at a 33% annual rate, contributing over 10% of Snap's revenue.

Snapchat+ is a vital product for Snap as it helps them mitigate challenges in ad monetization. Looking ahead, I believe this subscription model will become increasingly important in social media. With the rise of AI-generated content and bots, social media platforms may offer "human" content feeds, and differentiation could come from subscription programs like Snapchat+. Initially, these services cater to influencers and content creators seeking better visibility and features, but over time, ordinary users will adopt it, viewing it as a status symbol. Eventually, it could become a standard expectation, where lacking a verification badge and subscription may make users seem like AI bots.

Snapchat is well-positioned for this trend, especially considering its young demographic. Younger users are more tech-savvy and open to trying new things, which has driven the fast adoption of Snapchat+. Compared to X and Meta, which have seen slower growth in their subscription services, Snapchat is benefiting from its ability to capture this audience early.

So, why could Snap’s narrative change on Wall Street now?

There are several ways Snap could address its challenges and unlock growth:

• Embrace its niche focus on young adults: Snap should lean into its younger audience and make the platform more socially commerce-friendly. This demographic is ripe for e-commerce, as seen with TikTok Shops and platforms like Temu making social commerce mainstream in the West. Shoppable ad formats, which tend to have much higher CPMs than brand ads, could become a significant growth area.

• Snapchat+: As discussed earlier, Snapchat+ is in its early stages, and B2C social media revenue streams are still emerging. With more regulation on App Store fees, especially regarding companies like Apple and Google, Snap stands to benefit. As Snapchat+ becomes a larger revenue driver, surpassing 10% of total revenue, it could attract more attention from investors, which might lead to a re-rating of the stock.

• AI & GenAI ad enhancements: Snap should capitalize on the growing field of AI. Meta and Google have already seen huge improvements in ad conversions due to AI-driven tools like Advantage+ and Performance Max. While Snap is behind in this regard, it can catch up by leveraging external partners or open-source software. Even if they remain two years behind, this still presents an opportunity to enhance ad products and benefit from future AI-driven trends.

• GenAI agents and chat platforms: Snap should also explore the potential of GenAI for social media, especially on platforms like WhatsApp and Snapchat. By incorporating AI agents to support businesses and creators, Snap can tap into new revenue streams—moving away from traditional ad revenue and toward sales and labor-replacement budgets.

• TikTok ban as a call option: A potential TikTok ban or divestiture could be a significant opportunity for Snap. If TikTok is banned or sold to a non-tech company, Snap could benefit from user and advertiser migration. Even if TikTok remains operational, Snap stands to gain in the long term, especially if the ban deadline remains in place.

• Pressure from stakeholders due to current valuation: With Snap’s stock price at these levels, management faces increasing pressure to address issues like inflated costs and overblown ambitions. As seen with Meta, external pressures can force management to make significant operational changes. Even though Spiegel controls the company through super-voting shares, the influence of employees and investors pushing for stock price growth cannot be ignored.

• AR & Smart Glasses: 2025 could mark a mainstream moment for AR and smart glasses. If Snap can stop burning cash in its AR unit, it might sell it or benefit from the increased market interest in AR. If the market begins to value AR positively, Snap’s AR unit could see a valuation bump, boosting the company’s market cap.

Valuation

Now, let's dive into the valuation aspect, which is a crucial part of my investment thesis. A quick reverse DCF using trailing 12-month free cash flow shows an implied growth rate of 30.3% to justify the current price. While this rate seems high, Snap’s expected free cash flow growth makes it more reasonable. By fiscal 2026, free cash flow is expected to hit $830-840 million. This isn’t as far off as it seems, with Snap likely reaching those numbers in just two years.

Looking at the stock chart, we can see Snap has rebounded from the $8 range and has shown solid momentum since September. It’s now above the 200-day moving average, which sits at $10.71. If the momentum continues, Snap could maintain its upward trajectory.

For any user-based network, I prefer to value them using a metric I refer to as market cap per user. The reason for this is simple: when evaluating the core fundamentals of a social network, the key factors to consider are its user base size and the value it provides to its users (which can be measured in metrics like time spent or other engagement indicators).

Here’s a comparison of the results against some of its peers:

there’s a lot to look forward to. Do you think there’s hidden value in Snapchat? Let me know your thoughts in the comments below.

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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