After the bell yesterday, two high profile social media companies reported Q2 earnings, and both knocked it out of the park. Twitter (TWTR) and Snap (SNAP), the parent company of Snapchat, beat estimates all around and their stocks are both soaring in the pre-market this morning. Obviously, big beats like that are good news and the immediate future for both companies looks bright, but with both stocks jumping significantly since the releases, the question for longer-term investors is whether or not the success is sustainable.
The answer is yes, and the main reason is contained in something said by Snap’s Chief Business Officer, Jeremi Gorman, in her prepared remarks that accompanied the numbers. Referring to the less-than-expected impact of Apple's (AAPL) privacy changes in iOS updates, she said that they had seen higher opt in rates than they expected and than those generally reported across the industry. She went on to say that she saw that as an indication of the trust their users had in Snapchat. It's easy to be cynical and mutter, “well, she would say that wouldn’t she,” but there is another, broader reason for the high opt-in rate, and it is something I have pointed out several times in the past.
No matter how agitated older journalists, politicians, and commentators may get about privacy issues when it comes to data, most younger people don’t care. I noticed this several years ago based on conversations with my own children. They are all smart, savvy individuals and I expected them to be horrified when I pointed out that these big corporations were using their data to send them targeted ads and the like. What I got in all cases, though, was "Good. Better that than random ads for stuff I’m not interested in." Snap’s user base skews younger than other social media companies, so it makes sense their opt in rate would be higher, but the future is with the young guns, not us old folks(*).
That anecdotal evidence of indifference among young people to privacy issues when it comes to social media companies is now being backed up by hard data. If a company like Snapchat can get users to opt into data tracking and sharing, those users obviously feel that is a fair price to pay for all the “free” stuff they get on the platform. If you are older, and particularly if you have an innate distrust of large, successful businesses, you may be horrified by that but, as much as I hate to be the one to break it to you, your horror is irrelevant.
If the demographic that makes up the bulk of the users of a platform such as Snapchat are okay with it, then two things follow. First, the business model is intact. Data can be collected and sold, and ads can be targeted. Second, the political attacks on social media companies will slow or even disappear at some point. There is no political capital to be gained by attacking a company when the “victims” of their supposed crimes are giving up their data voluntarily. It seems, then, that monetization of users can continue, but there is one other question that remains. Can social media companies continue to grow users?
You can legitimately raise questions on that front given the level of saturation that most of us observe but even here, the earnings reports contained good news. Both Twitter and Snapchat reported big increases in user numbers. Snap did show a decline in its U.S. user base, but that is rather the point here. We may look around and think “who is left to sign up for this stuff?” but, in a global sense, our orbit is very small and there is a huge market still to be tackled and, for want of a better word, exploited.
So, with the business model of social media platforms back on track and with continued user growth, the pops in SNAP and TWTR and the spillover into stocks like FB and PINS all look fully justified. There may be a slight retracement in stocks in the space over the next day or two because the jump has been so pronounced, but if so, it will be more of a buying opportunity than anything based on the long-term prospects for social media.
*Incidentally, if you are a young person who feels differently, please don’t contact me to tell me you exist. I know you do. My point is you are probably in the minority.
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