Opinion

The 80/20 View: Snapchat’s business and valuation is absolutely flying, and here’s why

In his regular column for Mumbrella, media analyst Ben Shepherd looks at the soaring numbers behind image sharing social platform Snapchat.

Snap Inc, owner of the Snapchat app, is suddenly worth US$122 billion. This makes it worth more than Spotify, Twitter and News Corp combined. The cause? A dramatically improved product, a strategic and smart partnership focus, improved ad tools and a huge increase in confidence in market around the value Snap can offer advertisers.

Snap and pop!

When Snap shares closed on Friday afternoon, they sat at a record price. $77.97 USD, with a market cap of US$122.49 billion.

It’s capped off a remarkable 12 months for the business, which sputtered along for 3 years post IPO at a valuation lower than its list price. A business that many predicted the end of. Midway through 2021 it’s in rude health, having seen significant revenue increases during the COVID-19 pandemic, combined with continued uplifts in total users and also engagement.

So what is behind the success?

Snap is continuing to build out features, and it is becoming more collaborative and sophisticated at working with partners. This is boosting engagement and monetisation.

Snap is making a concerted, focused effort on growing its partner ecosystem across creators, publishers and developers. Snap was one of the earliest platforms to ink commercial deals with publishers, but a lot of its focus is on creating kit for developers that allows them to build out incremental features on the platform. This is yielding in a big way across AR and lens builds, and Story Studio gives creators enhanced tools to best tell their stories. End result is engagement improvement across all 3 areas.

Source: Snap

In tandem, Snapchat is building new features and functions at an enhanced rate, with features dramatically increasing over the past two-three years. Product innovation is attracting users.

Click to enlarge

And advertising innovation is attracting more advertisers, willing to spend more money. Snap is now an advertising platform with the features and functionality to rival Facebook and Google. Jerami Gorman and Snap North America sales boss Peter Naylor have transformed Snap as an advertising proposition with a far more confident and assertive sell. And the plan is to now recreate this across other markets.

And it’s yielding a LOT more money, revenue is flying

Q2 revenue was up 116% YOY, with North America up 129% YOY. This is staggering when you consider the pandemic induced downturn in overall advertising, as well as the Q1 result from Facebook which saw a 46% increase.


While usage is up, ARPU is the big reason for the dramatic upturn. Snap has become significantly better at monetising its users. For years Snapchat has been considered by advertising buyers as an extremely low cost option when compared with Instagram and Facebook, however this low unit cost had not historically translated to increased revenues. What Gorman and Naylor have managed to do is clearly articulate the value of the users, the engagement, and the ecosystem, and create a like for like 76% increase in ARPU in a market where the negotiation power has generally been on the demand side.


And this ARPU has massive room for improvement, which is likely the metric that is really pumping shareholders and the market. Annualised ARPU for Snap in North America is $22. Compare that to Facebook, which has an annualised North American ARPU of $233.


More features, plus a better ad platform will continue to rise this figure. To put this in perspective, if Snapchat had the ARPU of Twitter (and one could argue it has a superior ad product, visual platform, and native video integration), it would see revenues increase by 150%.

Focusing the ad business on 13-34 has become much more deliberate and targeted: And it makes sense

Snap is actively encouraging its advertisers to maintain their view of Snapchat as a young persons media platform. Whilst some of its competitors become age agnostic, Snap is realising the value in becoming an expert in 13-34. And in their view this is good for its advertisers business, specifically because Snap believes there are life events during this stage that it is uniquely placed to deliver on.

13-34 is a highly valuable zone for Snap as it has a high proportion of people in this age bracket residing within countries with large per capita ad spends. TV is particularly weak in 13-34, and this demographic remains elusive for marketers to target. And targetable advertising alternatives such as YouTube and Instagram lack the edge Snapchat has. 13-34 gives Snapchat a big enough slice of the ad market, allows them to stay focused on who and what they sell, and provides a compelling story across finance, automotive, education, travel and retail clients.


Costs are starting to decrease as a ratio to revenue

Overall costs are scaling down as a ratio of revenue, demonstrating this is sustainable and valuable growth.


Looking deeper, infrastructure costs are staying stable (potentially indicating these were too high to begin with) despite increased users, “Advertising Partner and other” costs are up, but the largest increase is “Developer and Content Partner Costs” – these are up 450%. These have ramped significantly since Q3 2020, but they have helped fuel record ARPU. This increased outreach to creators and developers is proving a masterstroke.

What’s next? Pump the ARPU through a deliberately direct sales approach

Armed with the confidence of Wall Street and the ad market, it’s time for Snap to raise its focus on its relationships with its critical advertising partners across North America and markets such as Australia. Sustainable, high yield growth will come from these partnerships becoming less transactional and more strategic, and Snap demonstrating with confidence it can become a business critical channel to deliver growth amongst 13-34 year old consumers.

This is unlikely to come through a reliance on ad agency revenue taking, it needs to come from enterprise marketer revenue making. And based on the tear its on right now, there’s no better time to really accelerate this approach.

Ben Shepherd is a media analyst.

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