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The Cost of Innovation for Snap

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Snap encouraged by the progress of Maps

As Snap’s revenue growth improves and its free cash flow (QQQ) swells, Snap (SNAP) has identified innovation as one of the key building blocks of its success.

During its 2Q17 earnings call with analysts and investors, Snap executives noted that they impressed with the performance of new products such as Maps. Snap considers Maps as one of its greatest innovations. People use Maps not just for directions but also for discovery, allowing them to learn more about the world and use Snapchat more.

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The cost of innovation

Given how rivals are cloning popular features of Snapchat, we believe that Snap’s best bet is to innovate more so it can stay ahead of the competition. But what is innovation costing Snap?

Excluding stock-based compensation, Snap’s budget for R&D (research and development) was $86 million in 2Q17, up sharply from $29 million in 2Q16. This trend is illustrated in the chart above. Snap’s R&D spending in 2Q17 was 47% of its overall revenues compared to 40% of its revenues in 2Q16.

Snap’s rivals Facebook (FB), Twitter (TWTR), and Alphabet’s (GOOGL) Google are also active on the innovation front.

Driving more value for advertisers

Snap depends on advertising for most of its revenues. As such, many of its innovations focus on creating products and tools to drive more value for advertisers and improve the user experience for its Snapchat subscribers. For example, automating the process of selling ads has helped Snap improve its advertiser traction.

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