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Could TikTok’s Loss Be Snapchat’s Gain?

In March, as lockdowns kept the world inside, Chinese company TikTok found itself becoming hugely popular not only with the younger generations — who were already obsessing over the app — but also with cat-loving, badly-dancing older generations too. For the first few months at least, TikTok provided short-term relief to lockdown life. 

This article was originally published on MyWallSt — Investing for Everyone.

Now, with tensions between China and the U.S. escalating, TikTok has become a cause for concern for many government officials and talks of banning the app are in progress.
If banned, in what way would Snap (NYSE: SNAP), the owner of the popular app Snapchat, benefit from TikTok’s removal from the U.S. market?  

 

Competing interests

Snapchat and TikTok have reportedly viewed each other in more friendly terms than their social media competitors, yet there are several comparable features where these companies go head-to-head. Snapchat’s ‘Discover videos’ directly competes for TikTok’s short video users; TikTok has direct messages which contend with Snapchat’s messaging service. 

The two companies share the same market, and a lot of the same type of users – in the U.S. 78% of those who use Snapchat are aged 18-25, whilst TikTok has 60% in the same age category. The loss of TikTok would give Snapchat the freedom to solidify itself as a strong competitor to Facebook (NASDAQ: FB) — which incidentally also took some of Snapchat’s most popular features such as ‘Stories’, resulting in Snap’s daily active user (DAU) growth stalling from 2018. 

With TikTok gone, Snapchat could benefit from an increase in DAUs and thus also revenue. However, investors should remain cautious as those users might instead turn to the likes of Instagram for more straightforward video content whilst keeping the popular ‘Stories’ feature of Snapchat. 

 

Revenue

Snap gets around 98% of its revenue from advertising and in Q1 of this year, the average revenue per user was around $2.02. When looking at North American users, this number is just shy of $4 per user with the U.S. alone averaging 3.5x more revenue per user than any other country. This is a market in which Snap will want to see more growth in the future. A loss of TikTok, therefore, could play in its favor if the number of Snapchat users increases or if the amount of time spent on the app increases. 

By the end of 2019, Snap had increased its revenue by 50% year-over-year to about $446 million. With lockdowns increasing the amount of time spent on social media, its recent Q2 2020 report showed a 17% increase YoY of Snapchat DAUs to 238 million, which outstrips Twitter’s (NYSE: TWTR) at 186 million DAUs. On top of that, its revenue of $454 million, had also increased by 17% YoY. 

Snap stock has been on an upward trend since 2018 — when it saw a particularly bad year as its stock dropped as low as $5. It has since regained its loss and reached a high of $26 on July 8, a 38% increase on its pre-coronavirus levels. With TikTok out of the way, Snapchat could cement itself in the social media history books, particularly as it seeks new ways to separate itself from the crowd. 

 

Innovation

Snap is constantly praised for its innovation, particularly in its mission to bring Augmented Reality into the mainstream. There have been a few hits and misses here and there, like its ‘Spectacles’ product, but nonetheless, Snap has remained a pioneer in AR.

Despite luke-warm receptions of the last 2 Spectacles products, the 3rd generation of its video-clip-creating sunglasses was announced in December. With more than double the price tag at $380, these glasses give the wearer the ability to produce 3D video clips and augment those clips with filters that interact with the environment. 

 

 

Augmented reality is going to be an even bigger player moving forward as Snap made the announcement that it will be developing an app store of its own, to rival not only Facebook but Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOGL) as well. This platform will allow developers to collaborate with Snap and use its AR features and camera software for games and other world-interactive apps. 

In my opinion, a loss of TikTok in the U.S. market could have the potential to boost user numbers, but that is not a certainty. What is certain, however, is the constant innovation that Snap encourages with its new products and software updates. Investors should focus on this instead because Snapchat has the potential to be something quite exciting in the near future.

 

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