Snap Is Ignoring Emerging Markets, and It's a Big Mistake

By Motley Fool Staff Markets Fool.com

Snap (NYSE: SNAP) has made a conscious decision to ignore emerging markets so that it can focus on developed ones like the U.S. and Europe. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, look at why Snap may not have much of a choice.

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A full transcript follows the video.

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This video was recorded on May 12, 2017.

Dylan Lewis:Something else to keep an eye on withwhat's going on with user growth is,all of it's coming fromNorth America and Europe. Youlook at the company'srest of world segment --those are the three ways they break it out right now -- and that's beenrelatively flat over the last three quarters. It's like 39 million,39 million, 40 million.I think some of that is connectivity. Obviously, developing parts of the worlddon't necessarily have access to the same broadband cell service. And,obviously, Snap is a very visual and data-heavy app. But, I think that'sproblematic long-term for the company.

Evan Niu:Yeah.I think that's a conscious decision on their part,because they're only focused on the U.S. and Europe. There's beenall of these headlinesyou've probably seen about,Evan Spiegel called India asbeing a poor country, anddoesn't want to expand into it. Of course,that didn't go over very well withusers in those countries. But,the underlying business rationale forwhy you might not want to expand in those countries is, admonetization in those countries is very low. It is,financially,very hard to make money there. But, of course,saying the country is pooris a horrible way to go about it. But,if you look at their business, theydon't really scale well toemerging markets because of their use ofthird-party cloud infrastructure, which we'lltouch on in a minute. Theircosts are very high, and themonetization is very low. So,if they were to expandinto emerging markets, itaccelerates their losses,because they get pinched by really poor ad rates and really high costs. So, financially, theydon't really have that much of a choice, because they would bleed out aton of money if they tried.

Lewis:Yeah.I guess I would argue that they're stillin the phase of business where it's OKto be creating losses,because if you're building thedaily active user base,people are going to ignore that for a long time. Ifyou can get into some of these emerging markets and really be rooted there, you'reputting yourself in a better long-term position. Whereas,right now,Facebookiseating their lunch in a lot of thesedeveloping markets, andthey're just dropping a lot of features that Snap has in its app thatthey really developed and popularized. I think by the time Snapgets to some of those markets,people are going to be like, "I canalready do this on Messenger or Instagram."

Niu:Yeah,I definitely think it's a short-sighted thing, toignore these emerging markets.

Dylan Lewis owns shares of FB. Evan Niu, CFA owns shares of FB. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.