1.28 Billion Reasons Why Snap Isn't a Threat to Facebook

By Adam Levy Markets Fool.com

There's no doubt Facebook (NASDAQ: FB) is feeling pressure from Snap (NYSE: SNAP). Just look at its numerous attempts to copy the functionality of Snap's flagship app, Snapchat.

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Since Facebook attempted to buy Snapchat for $3 billion about three years ago, it's been an endless parade of new features that copy one aspect or another of the app that's popular with young people. The social-media giant seems to have finally struck a chord with Instagram Stories, a blatant copy of Snapchat's Stories function.

But even if Facebook's attempts to curb Snapchat's growth fail, the company shouldn't feel too threatened by Snap. In its S-1, Snap wrote, "We often create new technologies and high engagement products that often require high-end mobile devices and high-speed cellular internet, and consequently the majority of our users come from developed markets."

In other words, Snap doesn't plan to compete in the developing markets outside of North America and Western Europe. That's a huge number of people that Snapchat can't, and won't, attract. Facebook, meanwhile, has 1.28 billion monthly active users in its Asia-Pacific and Rest of World regions, and that number is growing quickly.

Image source: Facebook.

The long tail of Facebook users

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Snap's strategy is to focus on growing its user base and monetization of the highest-value markets, like North America and Europe. In fact, the company didn't add any daily active users outside of those markets during the fourth quarter. By comparison, Facebook added 39 million new daily active users outside of those markets in just the last quarter -- that's the entirety of Snapchat's user base in those regions.

Users outside of the U.S., Canada, and Europe account for nearly 70% of Facebook's total users. However, they only generate about 25% of the company's total revenue. That's largely because Facebook is more focused on growing its penetration in those regions by making Facebook more accessible than it is on increasing revenue per user. The opposite is true in the U.S. and Canada, where Facebook is near saturation levels of penetration.

Average revenue per user (ARPU) in the U.S. and Canada grew 45% year over year last quarter. ARPU for the Asia-Pacific and Rest of World regions grew just 29% and 28%, respectively. But when you balance it with the user growth in both regions, Facebook is seeing similar revenue growth rates around the world -- developing markets are actually increasing total revenue slightly faster than developed markets.

The long tail of Facebook users outside of Snapchat's target market gives it significant protection from any threat Snap poses to the social network.

Much more long-term potential in those regions

The big benefit of Facebook's giant user base outside of the markets Snap focuses on is they offer significantly more long-term potential revenue growth than more-developed markets. Not only does Facebook benefit from more room to grow its user base in those regions, it will continue to benefit from faster growing digital-advertising markets.

Snap boasts in its S-1 filing that IDC estimates mobile advertising will triple from 2016 to 2020. What it doesn't mention is that the fastest-growing regions of mobile-advertising growth are outside of well-developed markets.

If Snap can't effectively penetrate those markets, it leaves them wide open for Facebook to capitalize on the rapid growth over the next few years as more advertising dollars come online. And did I mention Facebook already has a 1.28 billion user head start?

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.