The good reasons to buy Snap

I’m going to argue that Snap is worth every penny of its IPO pric

Snap Inc floats on NASDAQ later on this afternoon. It’s the talk of the investing world for two reasons: one, it’s a weird and controversial company; and two, it’ll be the biggest IPO for more than two years.

So I’m joining in the feeding frenzy. Today I’m going to make the case for the defence – I’m going to argue that Snap is worth every penny of its IPO price of $17, at a valuation of $22.5bn.

Tomorrow, I’ll argue that Snap is one of the silliest non-businesses ever to trade on the stock market.

You decide!

Silly, hard to use, and addictive

First the background. Snap is the company behind Snapchat, a messaging app for phones. It was started by Evan Spiegel as a project for his Stanford University product design class in 2011.

The genius of Snapchat is that the messages disappear once they’ve been viewed once. This doesn’t sound like a big deal, but it’s important. It’s basically the reason why Snap is valued at $22.5bn today.

When messages disappear after they’ve been read, the whole vibe around communication changes. It gets less serious. There becomes less need to respond to the message, or engage with what you’ve been sent. It makes the conversations more spontaneous, more emotional, more silly. It makes Snapchat stand out from a busy field of messaging apps.

That’s probably why Snapchat is a hit with teens and young people. It’s the kind of app you first hear about from your 13 year old cousin. Teens were the first to take to it, and they’re its most devoted users today. But now it’s popular with people of all ages.

So why is a disappearing-messages app about to float on the stock market for $22.5bn?

Attention is a valuable commodity

It comes down to attention. Attention is a scarce commodity – there’s only so much of it to go around. If you have people’s attention you’re in a good position. You can sell ads against it.

If you look at the TV ratings for Premier League and the NFL, you’ll see they follow a similar pattern. They go up for about 20 years, until 2017… at which point they start to fall. It’s the same with television more generally. Young people are watching far less live TV and paid TV than they used to. According to Neilsen, TV ratings among young people has been falling at 4% per year since 2012, and crashed by 10% in the second half of 2015.

Again, attention is a scarce resource. Young people don’t have time to watch live sport and live TV, because their attention is elsewhere. Their attention is increasingly on their phones and increasingly, on Snapchat.

That’s how Facebook makes its money (See my previous article, you’re worth £3.02 to Facebook). Hundreds of millions of people stare at their Facebook feed every day, Facebook stick ads in the feed, hey presto Facebook is a $400bn company.

Now think about the type of ads you see on Facebook, or on Google. They tend to be what’s called “direct marketing”. In other words you see the ad, click on it, and hopefully buy the product straight away. Direct marketing thrives online, where it’s possible to make super-targeted ads and calculate a precise return on investment.

What you don’t see much of on Facebook or Google is brand advertising. Brand advertising doesn’t lead directly to a sale. It’s designed instead to create a good impression in the viewers mind, so that they hopefully go out and buy the product at a later date. Usually brand advertising is targeted at young people, so the company can build up loyalty to its products early. Brand advertising lives on TV, direct marketing lives online.

The thing is that there’s far, far more money in brand advertising than there is in direct marketing. $50bn is spent on search advertising, which sounds like a lot. But $545 billion was spent on brand advertising in 2014. The technology company which figures out how to do brand advertising successfully could blow Facebook and Google out of the water.

The giant pool of money

So you see what I’m getting at. Snapchat has a lot of users, and a lot of attention. And brand advertising is a huge reservoir of money, waiting for a technology company to tap it. Might Snapchat be that company?

Snapchat has lots of users – nearly 200 million active every month. That’s good. The users skew young. That’s ideal for brand advertising. And the ads have the potential to work very well. They’re different to Facebook ads, which glide silently past as you scroll through the news feeds. Snapchat ads are full-screen video. And they only play if the user is interested – they cut out if the user takes their finger off the screen.

Snapchat has been positioning itself for this moment. Big media companies now put their “stories” up on Snapchat in an easy to digest, interactive video format. A bit like futuristic TV.

So that’s the general idea. Snap has captured the attention of 200m users, particularly young users. Thanks to its format it’s better placed than any technology company, including Facebook, to tap the giant reservoir of brand advertising money.

As for its $22.5bn valuation… well that’s pretty rich. The only way to justify it is to wave your hand dismissively and point at all the brand advertising money Snap is going to make in future.

Tomorrow, I’ll pick apart the optimistic story I’ve told in today’s issue.

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