Personal Finance

Snap's $250 Million Bet on Teen FOMO

Snapchat logo

FOMO, or the fear of missing out, is an epidemic of the social media age. When you're constantly bombarded with the highlights of all of your friends lives on Instagram, Snapchat, or Facebook (NASDAQ: FB) , your life can feel somewhat dull by comparison. It's like you're missing out on all of the cool stuff happening. The problem is especially prevalent among teens and millennials.

Snap (NYSE: SNAP) is aiming to capitalize on its audience's innate fear of missing out with its latest product feature, Snap Map. Snap Map lets you see where all your friends are and what they're snapping. The trailer introducing the feature shows two women seeing a bunch of their friends snapping from a concert, so they decide to go, too. In order to roll out the feature, Snap bought location-services company Zenly for a total of $250 million to $350 million in cash and stock. That's a big bet for a company the size of Snap.

Snapchat logo

Image source: Snap.

Where is the cash coming from?

Snap just raised $2.4 billion with its IPO, so it definitely has the cash to spend on Zenly. At the end of the first quarter, Snap had $3.2 billion in cash and short-term marketable securities on its balance sheet, so dropping $200 million in cash on Zenly (plus a few million shares of stock) is only a small pinch.

But Snap also burned through $155 million in cash to fund its operations last quarter, and that number is only getting bigger. Cash used in operating activities doubled in 2016 versus 2015.

In effect, Snap used an entire quarter of runway to buy a mapping app. Investors better hope it pays off.

Differentiating from Facebook

One of Snapchat's biggest challenges over the past year has been its ability to differentiate its product from Instagram Stories, which blatantly copied the story format from Snapchat. Instagram subsequently copied several other features from Snapchat like the core disappearing message functionality. It now boasts 250 million daily users for Instagram Stories, significantly more than Snapchat.

The idea of using a map as a user interface to discover more content is interesting, but ultimately, it's just another form of search. There's nothing fundamentally unique about Snap Maps other than the interface. That is to say, Instagram could quickly and easily copy the feature if it wants. Instagram already has geolocation features, and Facebook Messenger has the ability to share users' live locations with their friends. Throw a nice-looking map on top of that, and you have Story Map...or whatever Instagram wants to call it.

Growing revenue per user

Instagram's efforts to co-opt Snapchat's functionality have put a serious damper on Snapchat's user growth. That said, it's not like Snap is having any trouble holding onto the users it does have. In fact, engagement is improving, with the average user spending more than 30 minutes in the app per day during the first quarter. But it needs to find a way to attract new advertisers and show users more ads.

Snapchat's ability to grow revenue going forward relies significantly on its ability to increase revenue per user. Snap Map ought to help in two ways. On a basic level, Snap Map provides yet another opportunity for users to discover new snaps from their friends and other users in their area. That gives Snapchat more opportunities to show users ads.

On top of that, Snap Map opens the door for more location-specific advertising. Snap is trying to court small businesses with its self-serve ad platform. Providing an opportunity for businesses to advertise to users actively searching for things to do around them should produce good returns for both Snap and its advertisers.

Snap is spending a lot of money on this new feature (Zenly will remain an independent app as well). If it can translate into higher user engagement and higher-value advertisements, it could pay off. But don't be surprised if Facebook copies it, too.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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