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Why Facebook Inc (FB) Stock Holders Shouldn’t Sweat Snapchat




Last month, yours truly here opined that Facebook Inc (NASDAQ:FB) had nothing to worry about with online messenger rival Snapchat. The service has become big enough to merit its parent company going public as a means of taking Snapchat to the “next level.” But when all is said and done, I think FB stock — even with its new challenges — still will be the better investment of the two.

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Some new data and details about Snapchat’s parent Snap’s IPO have materialized in the meantime.

After giving that new information some thorough thought, I’m actually more convinced Facebook stock is the better pick of the two.

What’s Snapchat?

Snapchat, for the unfamiliar, is an internet messaging platform. Its “shtick” is simply that the posted videos, photos and messages self-destruct a few moments after they’re viewed. Its relatively new “story” feature will aggregate all your messages over the past 24 hours, but after that, they still vanish.

More important, Snapchat has a decent following. As of the latest look, Snapchat boasts 158 million daily users, which means it has a list of 158 million consumers that advertisers can market to. Not bad, particularly given its age. Facebook still dwarfs Snapchat with its 1.23 billion daily users, but Facebook had a multiyear head start and should be bigger.

Besides, Snapchat’s year-over-year user growth pace was in the mid-40%s overall as of the fourth quarter of last year. For its most recently-reported quarter, Facebook’s daily user growth was only up 17% year-over-year. Throw in the fact that advertisers are stoked about the fact that Snapchat is new and chic, and FB stock holders have good reason to be concerned.

Thing is, looking beyond the table-pounding bullish rhetoric, Snapchat (and by extension the upcoming Snap IPO) Facebook doesn’t really have much to worry about.

Losing Steam

Giving credit where it’s due, Instinet’s Anthony DiClemente may have said it best early this week when he reiterated the firm’s Facebook stock price target of $165 and “Buy” rating:

“Snap Inc. appears to be coming public later in its growth cycle than other internet companies, adding just 5mn global daily active users (DAUs) last quarter, demonstrating just 3% sequential growth. By contrast, at the time of their respective IPOs, Facebook and Twitter were growing nearly twice as fast. During 2016, Snapchat added 51mn DAUs, globally; by comparison, Facebook added 190mn DAUs in 2016. Our checks indicate that Facebook maintains a substantial lead in mobile app downloads… We come away reassured that Facebook maintains the ability to mitigate competitive threats via product innovation […] Snapchat’s user growth decelerated through 2H16, following the launch of Instagram Stories.”

In other words, when Facebook went public back in 2012, it was picking up steam. Snap is decelerating as it moves into its IPO.

It’s not just the notion that most social networking and messaging users have already made their choice that bodes poorly for Snap, however. There’s also the nagging reality that the strength of Snapchat’s advertising model is still an unknown quality. Some of what we do know, however, isn’t encouraging.

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Case in point: In November, AdAge reported that the average video ad shown via Snapchat was viewed less than three seconds before that viewer skipped past it. That’s not enough to pay off for an advertiser.

Oh, and let’s not forget that Facebook CEO Mark Zuckerberg once offered to acquire Snapchat for $3 billion. When Snap’s chiefs said no, Zuck bought Instagram instead, and is now using it to club Snapchat into submission. Snapchat’s growth pace was almost cut in half after Instagram’s “Stories” — comparable to Snapchat’s “Story” — was launched.

And if the recent rise of Facebook stock is any indication, the market agrees Snapchat just isn’t going to play the role of David to the Goliath that Facebook is. FB stock is up 16% since the end of 2016 against a backdrop of Snap buzz.

Bottom Line for FB Stock

Calling a spade a spade, Snapchat is a wannabe, jumping into the messaging fray when the premise of messaging was hot even if the business model wasn’t proven. As is so often the case, though, the wannabe simply can’t dethrone the entrenched powerhouse.

That’s not to say owners of FB stock have nothing to worry about. Chief Financial Officer David Wehner recently acknowledged, “We continue to expect ad revenue growth rate will come down meaningfully (in 2017).” It is to say, though, the established cash cow can easily fend off Snapchat.

The Snap IPO isn’t as much a fundraiser to arm the company as it is an exit strategy for its insiders who didn’t want to sell to Facebook five years ago.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


This article was written by James Brumley for InvestorPlace on Feb 13, 2017.

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