Investors in Snap, Inc. (NYSE: SNAP) can't be thrilled with its stock price performance so far. At around $12 per share, Snap trades well below its $17 IPO price and at less than half of its yearly high of $29.44. Still, the floundering stock is not really a function of bad execution, but rather some initial overexuberance and sky-high IPO valuation.
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Listening to its third-quarter conference call, the company is making many changes to prepare the business for the long term, but making so many changes so early is giving investors heartburn. But while management has its eyes quite rightly on the long term, whether it can get there is a matter of conjecture. Here are four things CEO Evan Spiegel & Co. want you to know.
Changing the app
One thing the company is changing is... the whole product! No wonder investors are nervous. Spiegel said one of the most frequent complaints received about Snap is that it is difficult to use. With Snapchat's monthly active user growth lagging expectations, it seems management thinks an app redesign is necessary. Spiegel put it quite honestly:
There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don't yet know how the behavior of our community will change when they begin to use our updated application. We're willing to take that risk for what we believe are substantial long-term benefits to our business.
Management may indeed be right, but investors won't know until it happens, and there is much at stake.
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Snapchat is not only redoing the app, but also optimizing its Android application. While many app developers optimize for iOS first, Android has much larger market share, at roughly 85% of worldwide smartphone revenue. Recently, the company invested in its Android capabilities, reducing the time to open the Android app by 20%, resulting in "significantly more" Android users added in September.
However, It appears there is much more work to do, as management also pointed to a redevelopment of the Android app "from the ground up" coming. So, not only will the company redesign the app, but also reoptimize for it Android. Still, since active user growth has been a concern for Snap investors, improving the Android experience is crucial.
Management also talked about its plan for going after users in developing countries. Since Snapchat is primarily a video app, it uses up large amounts of bandwidth, which has been an obstacle to developing-country penetration.
This quarter, Snap improved the app's playback function so that its download-and-playback doesn't take up as much bandwidth as it used to. In addition, the company is partnering with mobile carriers in target countries to work on optimizing Snapchat for those networks. Meanwhile, Snapchat was proud to announce it has 70%-plus penetration of 13- to 34-year-olds in the U.S., U.K., France, and Australia, which it believes can help fund its growth in other countries.
Changing how it gets paid
As if all these app changes weren't enough, Snap is also changing the way it gets paid. One year ago, all of Snapchat's ad sales were done through direct sales. Fast-forward to today, and 80% of Snap's ad impressions were done through an unreserved automated auction system.
On the downside, this has decreased Snapchat's average CPM, or "cost per thousand impressions," by 60%. On the upside, management believes the more efficient automated system is key to scaling the business over time. In fact, when there were multiple bidders in the auction, Snapchat found pricing increased by an average of 40%. As higher volumes of advertisers come onto the platform, Snapchat should thus see an increase in pricing as the bids become more competitive. In addition, the lower pricing caused a tripling of revenue from small to medium-sized businesses last quarter. That's a great sign.
Moving parts everywhere
BTIG analyst Rich Greenfield said during the conference call, "It seems like you've only been public for eight or nine months. It seems like a significant amount of change in a short period of time." Greenfield's right, and that is no doubt making investors nervous, especially for a company trading at 24 times price-to-sales.
Still, improving the app, going after developing countries, and automating ad sales all seem like the right moves to me, so investors should definitely keep an eye on Snap's execution on these fronts, as they could make for a very profitable future. From my and apparently other investors' perspectives, however, it's still far too early to tell.
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