With businesses strapped on cash amid the pandemic, investors were expecting a significant decline in digital ad spending. Then, Snap Inc. (SNAP) reported their financial results.
The maker of Snapchat, a mobile application popular with people under the age of 30, posted blowout numbers Wednesday. Needless to say, it was a huge surprise. Only a week ago, Facebook (FB) managers implied tougher times in digital ads were coming
Those impressive Snap numbers may usher in a giant reset.
Snap and Facebook have been bitter rivals since the beginning. In 2013, Facebook CEO Mark Zuckerberg made overtures to buy Snap. The tiny mobile app company got a lot right in its quest to secure coveted younger users.
The quirky design was genius because of its incorporation of augmented reality, Bitmoji avatars and nifty picture filters. Also, its story feature gave users a reason to keep coming back throughout the day and continue posting.
Related post: Why Ads Are the Future of Streaming Media
Snap would have been a handsome addition to a Facebook portfolio that already included WhatsApp and Instagram. However, each time Zuckerberg made an offer, he was rejected.
So, the chieftain did what large technology companies do: Zuckerberg had company engineers build features that mimicked the best parts of Snapchat. The duplication lifted avatars, augmented reality and stories. Many of these features eventually made their way into several Facebook properties, like Messenger.
To retaliate, Snap managers detailed the tactics in the Project Voldemort Dossier, a full accounting of the anticompetitive practices sent to the Federal Trade Commission. According to a Wall Street Journal report, Snap managers felt it was the only way to make the rip-offs stop.
Facebook’s attempt to challenge Snapchat was ultimately a failure. Although Instagram did eventually incorporate a story feature, Snapchat has been able to remain completely independent and thrive as a publicly traded company.
And judging from the financial results Wednesday, Snap is having the last laugh. The San Francisco company reported sales of $462 million, up 44% year-over-year as daily active users surged 20% to over 229 million. This far exceeded analysts’ estimate of only $427 million.
The larger question is what all of this means for Facebook and Google, the 800-pound gorillas of digital ad spending.
Many analysts have been busy downgrading the prospects for continued sales growth, even as most of the Western world is stuck at home on quarantine. The fear is that cash-strapped companies are going to drastically reduce their ad spending.
Related post: Google and Facebook Will Be the Last Ad Platforms Standing
Considering the unexpectedly stellar Snap results, this pessimism may be unwarranted.
We have recommended long-term positions in both Alphabet (GOOGL), the parent company of Google, and Facebook. The firms will report financial results May 5 and April 30, respectively.
Investors should strongly consider these picks.
Best wishes,
Jon D. Markman
