Snap’s revenue soared past Wall Street’s estimates as it flooded its app with ads, sending the social media aspirant’s shares past the IPO price for the first time since July. In bidding its stock up by 40%, investors are sticking the company with a fat multiple – 28x trailing revenue – and a $23bn market cap. Yet relying on new ad inventory creates a potential pitfall as it will now need rising ad prices to support future growth if it hopes to sustain that valuation.
Last quarter, Snap’s topline expanded by 72% year over year to $286m. But to get there it grew ad impressions by almost 7x (even on a sequential basis, it picked up speed, increasing impressions at a faster rate than it had a quarter earlier). Assumptions that Snap can get advertisers to pay more for ads are baked into its valuation, although the surge in ad impressions came with a 70% drop in ad prices. Still, to Snap’s credit, its management has already inked acquisitions that could help it grapple with that problem.
To encourage advertisers to pay more for their ads, Snap will have to demonstrate that ads in its app are effective, not just available. According to 451 Research’s M&A KnowledgeBase, two of its last four purchases aimed to do just that. Its pickup of Metamarkets brought it specialized advertising analytics software, along with a wealth of data on the performance of programmatic advertising. Its earlier reach for Placed brought it tools that tie ad exposure with real-world actions. Organically, it’s addressing this issue with last November’s launch of Snap Pixel, which connects Snap ad impressions to website visits.
For future acquisitions, an ideal target would help link Snap ads with brand performance. The companies with data on retail purchases do that well, although most are either too large (Nielsen) or already acquired (Datalogix). It could veer into sentiment analysis by picking up Crimson Hexagon or one of the many, cheaper social analytics specialists. Another option would be to scoop up 4C Insights, which would bring it social analytics, TV campaign data and social ad buying software that was an early enabler of self-serve Snap ads.
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