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Snapchat can thank India for its soaring stock price

Snapchat’s stock price briefly hit an all-time high today (Dec. 29) after receiving a very enthusiastic buy rating from analysts at Goldman Sachs, who boosted their 12-month price target for the stock by two-thirds, citing new features, strong ad sales, and a growing user base.

Snapchat’s user base has grown 75% in the two years since it plateaued during a disastrous 2018. In that inauspicious year, the app began losing users, prompting a string of company executives to quit and elegies from both Fox News and Kylie Jenner. Snap Inc.’s stock price sank to $5 a share, down from the $17 it commanded during an ebullient 2017 IPO.

Then, in 2019, a miracle happened: Snapchat started growing again. At the time, Wired chalked the social network’s survival up to a loyal cohort of teens who eschewed Facebook (which became thoroughly uncool years ago). But Snapchat’s latest earnings show that—while its users do skew much younger than Facebook’s—it wasn’t American teens who turned the user numbers around. Most of the company’s growth has come from outside of North America and Europe, in a category it nebulously describes as “Rest of World.”

The lion’s share of Snapchat’s Rest of World growth appears to come from India, although Snap doesn’t officially report country-by-country data. The company did say, however, that it saw a 150% jump in Indian users between the third quarters of 2019 and 2020. India has reportedly supplanted the US as the biggest source of new Snapchat users on earth.

There are several factors driving Snapchat’s growth in India. First, Snap redeveloped its neglected and buggy Android app in 2019, making the platform more palatable in India and other markets where Android devices dominate. At the same time, it began investing in India-specific content for its Discover platform, and now offers 60 channels of culturally relevant entertainment for Indian users. And finally, 2020 brought on a pandemic that left people everywhere aching for virtual connection, and a TikTok ban in India that cleared out a major competitor in a massive market.

Snap has, however, struggled to fully cash in on the sharp growth outside of Europe and North America. Its average revenue per user in the “Rest of World” category has remained basically flat, while most of its revenue growth has come from finding new ways to sell ads and engage users in the US.

Investors seem especially pleased with the company’s efforts to wring more revenue out of American teens and 20-somethings. The Goldman Sachs analysts applauded new features that could keep users glued to their screens for longer—like Spotlight, a loose TikTok clone that allows users to post videos to a stream of public content—and new strategies for squeezing more profitable ads into that screen time.

Those tactics could keep revenue growing even without a growing user base. “There could be a benefit to user engagement and ad inventory creation that doesn’t necessarily show up in reported DAU figures,” the analysts wrote.

The stock market has pumped up Snapchat’s valuation—just as it has for many tech firms this year. But Wedbush Securities analyst Michael Pachter sounded a note of caution. “It’s pretty simple,” he says. “Most investors know how to draw a line between two points, and most of them extrapolate the line into perpetuity.” When the user and revenue lines looked flat in 2018, investors declared Snapchat dead. Now that those lines are trending up in 2020, investors expect tremendous growth forever.

Keeping the lines pointed in the right direction may depend increasingly on Snapchat finding ways to make money in India and other new markets.

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