At its virtual Investor Day Feb. 23, Snap executives announced the company is on track to generate revenue growth of more than 50% YoY for the next several years, and laid out the strategy to achieve this target.
Snap has organized its mobile app into five main screens (left to right): Map, Communications, Camera, Stories, and Spotlight. These screens are represented in the Action Bar at the bottom of the Snapchat app. Management believes Snap is only monetizing one part of the total engagement in the Action Bar—Stories/Discover.
Maps, Communications, Camera, and Spotlight remain virtually unmonetized. Management laid out its plan for each of these screens, including strategies for monetizing each.
Source: Snap Investor Day Presentation Slides
Roadmap for Growth
Looking ahead, executives believe Camera is the company’s biggest opportunity. The key area for investment will continue to be augmented reality. CEO Evan Spiegel said Snap plans to take product innovations like augmented reality Lenses and develop them into platforms by building tools for creators and developers, and providing distribution so these creations reach the Snapchat community:
“In the past few years, our substantial investments against our vision for augmented reality have put us in a position to lead the industry, and we’re doubling down on this strategy in 2021. Augmented reality has evolved from something fun and entertaining into a real utility. Our camera can solve math equations; scan wine labels to find ratings, reviews, and prices; tell you the name of the song you’re listening to; and so much more… And we’ve barely scratched the surface of what’s possible.”
Snap’s goal is to transform its camera so users can experience the world around them in a new way. Executives plan to achieve this goal through the use of augmented reality. The company’s augmented reality platform is driven by three major efforts:
1. Innovating in technology to unlock new capabilities in the camera.
2. Exploring creatively to design exciting and informative experiences.
3. Supporting a growing community of AR consumers and creators.
Executives expect the growing momentum for AR in smartphones will provide a tailwind for Snap’s AR efforts. The future of Snap’s camera includes a fully integrated AR application, which will provide ample opportunities for more effective monetization as the technology progresses. Management anticipates the advertising inventory potential for a fully integrated AR camera application within Snapchat will be enormous.
As previously mentioned, Stories is the company’s largest driver of revenue. Snap generates the vast majority of its revenue from Snap Ads inserted in between Stories. This is Snap’s most mature monetization screen, but CFO Derek Anderson noted that Stories is still not even close to realizing its full potential. Snap continues to see high demand for advertisers in this function, and Anderson expects Stories to continue to be the largest revenue driver moving forward.
Snap also sees a lot of potential monetization opportunities in its Communications application. The company recently introduced two new offerings: Minis and Games. This is where users can engage with other members of the Snapchat community to play, learn, and have fun together. Currently, monetization of the Communications screen is predicated on the sharing of sponsored AR experiences among friends. Snap Games currently has around 30 million monthly active users and the company is beginning to roll out its monetization strategies for this function.
Snap’s strategy is to monetize Snap Games mainly with Snap Ads, similar to the Discover function within the Stories screen, with the potential to sell in-app purchases for incremental content. Snap Minis offers a plug-in platform for merchants to drive transactions. Potential examples of this include movie theater tickets, restaurant reservations, food delivery/orders, etc. As Minis and Games expand and become more popular in the Snapchat community, management believes it will become another billion-dollar platform over the long term.
Management sees Snap Maps as a sizable opportunity moving forward. More than 250 million users engage with Snap Maps each month to find their friends and see what’s happening around the world. The company has begun integrating businesses in Snap Maps and sees this as a tremendous opportunity for small businesses to build relationships with the Snapchat audience. There are now 35 million businesses integrated on Snap Maps. In 2021, Snap plans to focus on building utility for local businesses to begin to lay the groundwork for future monetization. The company believes that Snap Maps will ultimately be a multibillion-dollar platform and that it represents “a logical on-ramp to Snap’s advertising platform for millions of small businesses around the world.”
Late last year Snap launched Spotlight, a platform that highlights the most creative and fun snaps from the Snapchat community. The company is currently seeing 175,000 submissions per day, with more than 100 million monthly active users on Spotlight. Snap is excited about the potential of Spotlight to drive advertising revenue moving forward, as the platform is already attracting a large and engaged audience.
Snap’s CFO Derek Anderson made the most important revelation of its investor day when talking about the company’s future projections:
“We believe that based on the monetization platform we’ve built, and the product roadmap we have discussed today, that we can responsibly grow our topline revenue at 50% or better YoY for at least the next several years.”
Conclusion
To deliver on its product road map, for the next several years Snap executives expect to continue to prioritize revenue growth over short term profits and margins. The company sees sizable potential monetization opportunities in each of its five screens. As it currently stands, Snap derives most of its revenue from just one of those five screens.
The key takeaway from Snap’s Investor Day is the company’s roadmap, and management’s projections for sustained growth of 50% or more. The monetization opportunities for Snap’s Camera, Games, Maps, and Spotlight functions represent potentially large drivers of future revenue. If Snap can successfully execute on its roadmap in each of these functions, the 50% growth rate over the next several years that management is forecasting is achievable.
Consensus estimates for Snap are for 52% YoY growth in 2021, 44% YoY growth in 2022, and 44% YoY growth in 2023. If Snap is able to successfully implement its monetization strategies in each of its untapped applications, there is potential for an upside surprise on current consensus revenue projections.