Snapchat Still Isn't Attracting Advertisers

Snap (NYSE: SNAP) has quickly transitioned from a direct sales business to a self-serve platform to sell advertising in its flagship app, Snapchat. The self-serve approach enables Snap to reach a much broader audience of marketers. In fact, the auction dynamics of the self-serve platform are heavily reliant on Snap attracting a critical mass of advertisers in order to bid up average ad prices.

During Snap's third-quarter earnings call, CEO Evan Spiegel said, "We have a significant opportunity to grow the number of active advertisers." A recent survey from eMarketer makes that very clear. Just 28% of U.S. marketers use Snapchat, according to the research firm. That compares to 69% of marketers using Instagram and 86% using Facebook (NASDAQ: FB).

However, while there's a massive opportunity to increase its penetration of marketers, Snap hasn't done a very good job of it. Snap's active advertiser penetration in the U.S. is up just 13% year over year, according to the survey. By comparison, Instagram's advertiser penetration is up nearly 11% on a much larger base.

If you build it...

Snap has invested a lot of time and money in developing its self-serve ad platform and new ad products that might appeal to smaller advertisers. Smaller advertisers tend to be more focused on direct-response ads, which produce instant results -- a website click, an app download, a sale, etc. To that end, Snap has created several new ad formats as well as improved its measurement capabilities.

However, just because it built all of these capabilities for small advertisers doesn't mean they'll come flocking to Snap. The company still has a lot of work to do to onboard more advertisers to the platform. It's spent $300 million on sales and marketing through the first nine months of 2018. That's down from $412 million in 2017. And while investors might see that as the company becoming more efficient, it's ultimately going to limit the number of new advertisers it brings onboard.

Perhaps the biggest challenge for Snap in attracting advertisers is that marketers don't really use Snapchat organically, as eMarketer's Debra Aho Williamson points out. Snap redesigned its app at the beginning of the year to "separate the social from the media." In effect, Snap curtailed the ability for marketers and influencers to reach a wide audience.

By comparison, Facebook and Instagram encourage marketers to join the platform and produce organic content. 90 million business have a Facebook Page set up to share content with their audiences. Over 25 million have an Instagram Business profile. Facebook offers businesses free tools to find and engage an audience on its platforms, and then asks if they'd like to spend money on premium features later. Snapchat just asks marketers for their money upfront.

Instagram also benefits from its relationship with Facebook. Marketers can buy Instagram ads on the same platform they buy Facebook ads, and they can use the same targeting data available through Facebook. So, Instagram has a major advantage in getting its ad products in front of marketers efficiently.

So, what's behind Snap's growth?

Despite attracting just 13% more marketers in the U.S., Snap grew revenue in North America by 24% in the third quarter. Fueling that growth is an increase in advertisements on the platform. Ad impressions increased 278% year over year.

Ad impressions aren't coming from increased engagement, though. Not only is the company's daily active user count starting to trend downward -- down 1% sequentially and up just 5% year over year -- but activity is declining as well. Total Snaps created fell to 3 billion per day in the third quarter from 3.5 billion per day in the third quarter last year.

Snap is simply showing more ads per activity in the app. While that's a good way to grow, it's not sustainable long term. Facebook just saw a major slowdown in advertising revenue growth due to saturating ad load in its news feed. Driving impression growth through ad load won't last very long at Snap, and if pushed too hard, it could cause users to become less engaged with the platform.

If Snap wants to grow long term, it needs to invest in onboarding more advertisers. Better yet, developing tools for marketers to reach users organically, like on Facebook or Instagram, could provide it with a more efficient onboarding path.

10 stocks we like better than Snap Inc.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Snap Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.