Can Snap, Inc. Expand Beyond Its Core Millennial Demographic?

Snap's (NYSE: SNAP) popular Snapchat service is all the rage with young social media users, particularly teens. While that fact is often framed as a threat to larger social networks like Facebook (NASDAQ: FB), it's arguably a bigger risk to Snap given the lofty expectations that are being priced in to its preliminary valuations ahead of its IPO. It should be clear that Facebook isn't seeing any signs of decreased engagement, even as it competes for user attention with rivals.

When you consider Snap's growth expectations, the pressure will be on not only to grow ad sales in order to keep up with those massive cloud infrastructure spending commitments, but also to hopefully expand beyond this relatively niche demographic. This is such a prominent risk that it's the first one listed in Snap's S-1 Registration Statement.

Image source: Snap.

Snapchat isn't mainstream (yet...?)

Snap notes on its site that Snapchat reaches 41% of all 18- to 34-year-olds in the U.S. every day, citing a Nielsen study from 2015. Yet, people over the age of 34 don't really use Snapchat in meaningful numbers. In contrast, your uncle can't stop tagging you in photos on Facebook. Even within the 18-34 age group, Snap has discerned a notable discrepancy in terms of engagement.

Correlation is not causation, but one possible way to interpret that discrepancy is that users potentially become less engaged as they get older. But Snapchat is so young that it's probably too early to extrapolate from short-term trends.

At the same time, it's useful to compare Snapchat's engagement with Facebook's, since Facebook is the de facto mainstream social network. Facebook occasionally provides official figures for time spent on its site, with the most recent being the April 2016 earnings call. Said Mark Zuckerberg (emphasis added): "Today, people around the world spend on average more than 50 minutes a day using Facebook, Instagram and Messenger, and that doesn't even include WhatsApp yet.

That was nearly a year ago, and time spent on Facebook's family of services has continued to grow since. Time spent increases further if you include WhatsApp, even though Facebook hasn't started to monetize WhatsApp quite yet and even when it does, it won't be with ads. Furthermore, Facebook's average time spent spans a massively larger user base, one that includes a much broader age range, and includes users in far more diverse geographical markets all around the world.

Snap wants to sell prospective investors on the narrative that it's the next Facebook, but that will require expanding into the mainstream. That's a tall order to fill given the niche nature of Snapchat. Let me know once your mom starts Snapping.

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Evan Niu, CFA owns shares of Facebook. Evan Niu, CFA has the following options: long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.