Snapchat has grown to become one of the most popular social media platforms, especially among younger users. The app allows users to share photos, videos, and messages that disappear after being viewed. Snapchat’s fun features like lenses and filters have attracted millions of daily active users. But how does Snapchat actually make money? Here is an in-depth look at Snapchat’s business model and revenue sources.
Snapchat’s User Base
As of Q2 2022, Snapchat had 347 million daily active users worldwide. This is a 18% increase year-over-year. The majority of Snapchat’s users are in North America and Europe. Snapchat is extremely popular among younger demographics, with 90% of daily active users being between the ages of 13 and 24. Snapchat has maintained its appeal among younger users even as demographic trends on other social platforms have skewed older. Snapchat’s focus on close friends and fun, ephemeral content has made it a hit with teenagers and young adults looking for a more intimate social experience.
Snapchat’s Revenue Sources
Snapchat has three main revenue sources:
- Advertising revenue from Snap Ads
- Revenue from Spectacles (Snapchat’s AR glasses)
- Other revenue from Snapchat’s partnerships and content platform
The vast majority (over 90%) of Snapchat’s revenue comes from advertising through Snap Ads. Snapchat offers a variety of advertising options including video ads, filters, lenses, and sponsored content. Brands can run ad campaigns targeted to specific demographics and locations. Snapchat leverages its wealth of user data to help target ads effectively.
In addition to advertising, Snapchat generates revenue from its Spectacles line of augmented reality glasses. Spectacles allow users to create Snaps from a first-person POV. While Spectacles are not a major revenue driver, they demonstrate Snapchat’s commitment to exploring innovative experiences through AR and hardware products.
Finally, Snapchat generates some revenue through partnerships with third parties. For example, Snapchat partners with various content creators, publishers, and developers to create curated content and games within the app. Snapchat likely takes a cut of the revenue from these partnerships.
Snapchat’s Revenue Growth
Here is a look at how Snapchat’s revenue has grown over the past 5 years:
| Year | Revenue | YOY Growth |
|---|---|---|
| 2018 | $1.18 billion | 43% |
| 2019 | $1.72 billion | 45% |
| 2020 | $2.51 billion | 47% |
| 2021 | $4.12 billion | 64% |
| 2022 Q2 (TTM) | $5.79 billion | 41% |
As the table shows, Snapchat has experienced rapid revenue growth over the past 5 years. Revenue grew from $1.18 billion in 2018 to $5.79 billion TTM as of Q2 2022, representing a 390% total increase during this period. Growth has accelerated recently, with revenue up 64% YoY in 2021. Snapchat’s revenue mainly comes from Snap Ads, its in-app advertising platform which has gained traction among brand advertisers looking to reach Snapchat’s young user base.
Snapchat’s Net Loss
While Snapchat has achieved impressive top-line revenue growth, the company is not yet profitable and has accrued substantial net losses since launch. Here are Snapchat’s net losses over the past 5 years:
| Year | Net Loss |
|---|---|
| 2018 | -$1.25 billion |
| 2019 | -$1.03 billion |
| 2020 | -$944.8 million |
| 2021 | -$487.9 million |
| 2022 Q2 (TTM) | -$561.5 million |
Snapchat loses money because its costs and operating expenses currently outweigh its revenue. Major costs for Snapchat include research & development, marketing and employee compensation. Snapchat hopes to eventually reach profitability by continuing to scale its user base and advertising products. The company has made progress in reducing losses over the past two years. But it remains to be seen when exactly Snapchat will begin turning a net profit.
Valuation
As a public company, Snapchat’s valuation is determined by its share price and market capitalization. Here’s a snapshot of Snapchat’s current valuation:
- Stock ticker: SNAP
- Share price (as of October 2022): ~$10
- Market cap (as of October 2022): ~$16 billion
- P/E ratio (as of October 2022): -55.8x
Snapchat completed its IPO in March 2017 at a price of $17 per share. The stock saw lots of volatility in subsequent years before cratering in 2022 amid a weak advertising market and competition from TikTok. Snapchat’s P/E ratio remains negative given its lack of profitability. Investor sentiment around Snapchat will depend largely on whether the company can successfully monetize its user base and reach sustainable profitability over the coming years.
Future Revenue Growth Potential
Snapchat still likely has significant room for revenue growth in the future. Here are some of the key opportunities:
- Increase advertising revenues from existing users – Snapchat can provide more value to advertisers by improving targeting capabilities and rolling out innovative new ad formats.
- Expand user base internationally – Snapchat has room to grow in international markets like India, which already accounts for over 15% of daily active users.
- Monetize new features – Snapchat has successfully monetized Stories in the past and can likely do the same with new capabilities like Spotlight and Maps.
- Grow ARPU in Rest of World markets – Snapchat’s average revenue per user is lower outside North America and Europe, signaling room for growth.
- Launch new revenue streams – Snapchat has the opportunity to expand into ecommerce or launch a paid subscription offering to complement ads.
Snapchat also benefits from its strong network effects – the more users on the platform, the more valuable it becomes to advertisers. If Snapchat can sustain user growth and continue innovating with new features and ad formats, it may be able to considerably grow revenue over the long-term.
Competitive Landscape
Snapchat faces competitive pressure primarily from these social media platforms:
- TikTok – The viral short-form video app has absorbed much of Snapchat’s user growth in recent years. TikTok is also emerging as a major competitor in digital advertising.
- Instagram – Snapchat’s Stories and camera features have been mimicked by Instagram, which enjoys a much larger user base.
- YouTube – The video sharing site attracts similar video ad dollars as Snapchat.
- Facebook – While less direct competition, Facebook still dominates social media and digital advertising more broadly.
Snapchat’s ability to differentiate itself through innovative features and lock in younger users will be critical to competing effectively versus larger players. The network effects around Snapchat’s user base are a strong competitive advantage if the company can maintain growth momentum.
Conclusion
Snapchat has shown the ability to innovate and dramatically scale its business in recent years. Revenue grew from $1.18 billion in 2018 to $5.79 billion TTM as of 2022 on the back of Snapchat’s engaging user experience and expanding ad products. But competition has intensified, especially from TikTok, putting pressure on Snapchat’s growth and stock price.
Snapchat isn’t profitable yet as innovation and user acquisition costs have outweighed revenues. But with 347 million daily active users and room to expand both ad revenue per user and monetization of new features, Snapchat likely has a long growth runway ahead if it can execute well. The company will need to carefully manage expenses and focus innovation on the features that drive real revenue growth and profitability.
How Snapchat navigates the competitive and macroeconomic challenges in the years ahead will ultimately determine whether the company can transition into a sustainable business built atop its massive user base. The stakes are high for Snap CEO Evan Spiegel as he seeks to fulfill the growth potential of the iconic app he created back in 2011.