Shares of Facebook Inc. currently present the most attractive investment in the social media space. Should FB stock investors worry over the SnapChat IPO?
Venice, California-based Snap, the parent company of the popular photo sharing app, Snapchat, is officially readying for a $25B IPO. In what could be one of the biggest IPO of 2017, will the Snapchat IPO hurt Facebook Inc (NASDAQ:FB) stock? FB stock has rewarded shareholders handsomely over the last few years, having risen by over 250% since the Facebook IPO. Is Facebook's status as the number one investment in the social media space under threat? Could Snapchat take away critical ad dollars from the social networking giant? Well, if usage metrics and user growth trends are anything to go by, FB stock investors can rest in peace. The chances of Snapchat eating into Facebook's user growth and ad dollars look extremely bleak.
Facebook and Instagram are still accounting for a major share of Social Media time.
All the social media platforms including Twitter (NYSE:TWTR), Facebook, Messenger, Instagram, Snapchat, Youtube are essentially fighting for a greater share of users time. As the popular adage goes, "Time is Money" and even more so in the world of online advertising. A greater share of user time is also perceived as higher engagement, which can attract even more ad dollars. Based on a recent report from socialmediatoday.com, Youtube occupies the top spot in terms of time spent on social media platforms, at 40 minutes per day. While Facebook comes in second overall, in combination with Instagram, Facebook's photo-sharing app, the Menlo Park-based social networking giant accounts for 50 mins of daily usage, making up a 43% share of the average daily time spent on the various social media platforms. Snapchat accounts for just over 20% share, with 25 minutes of daily usage. Facebook with its increasingly popular photo-sharing app, Instagram, still trump their nearest competitors in terms of engagement. In addition, the rising engagement levels on Instagram should only help to increase this lead while also hurting SnapChat, given the huge overlap between the SnapChat and Instagram products.
Facebook Is Still Growing Faster Than SnapChat.
A lot of the Snapchat IPO chatter has focussed on the user growth and the accompanying revenue growth. Snapchat saw its Daily Active Users (DAU) grow by a huge 47% YoY in 2016, which is laudable. However, viewing SnapChat's user growth in a bit more detail throws up some uncomfortable facts, something the company wouldn't want investors to focus on. Consider this: SnapChat saw its DAU base grow by 51M in 2016, closing the year with 158M DAUs. In comparison, Facebook added 189M users to its DAU base in the same period. More importantly, Snapchat's user growth is showing a clear sign of plateauing, so early in its life cycle. The company printed QoQ growth rates of 14%, 17.2%, 7%, and 3.3%, respectively, for the 4 quarters of 2016. The comparable numbers for Facebook were 5%, 3.5%, 4.5%, and 4.1% for the 4 quarters of 2016. Snapchat's DAU growth is not only slowing down, but it also grew at a slower rate than Facebook's DAU growth in Q4 2016.
Snapchat's DAU additions, on an absolute basis, was nearly 27% of what Facebook added, in 2016. So why is Snapchat's growth beginning to fizzle out? Facebook has successfully wiped out Snapchat's moats by integrating/adding most of the SnapChat features to its array of apps through features such as Facebook live, Instagram stories, etc.. For example, In our recent Snapchat IPO coverage, we had pointed out how the launch of "Instagram Stories" has quickly caught on and is now used by nearly 4 times the users of Snapchat's "Stories" product. The possibility of Instagram eating into SnapChat's user growth cannot be ruled out at this stage, as Snapchat's slowdown also coincides with the launch of Instagram stories, which hit the market in Q3 2016. Along these lines, we believe Snapchat lacks a sustainable "competitive edge" and will find it extremely hard to ever match the scale of operation that Facebook currently operates at. In short, Facebook is still outgrowing SnapChat, on an absolute basis, and it could also outgrow the self-proclaimed "camera company" in terms of percentage growth in the coming quarters.
Putting It All Together
The chatter around the Snapchat IPO has heated up since the company officially filed for an IPO last week. Some sections of the media have focussed on the potential impact the SnapChat IPO might have on other popular social media stocks. Facebook, one of our top stock picks, has more often than not found a place in these discussions. However, we believe that the SnapChat IPO is a non-event as far as the Facebook investment thesis is concerned. The chances of SnapChat hurting Facebook's user growth and subsequently taking away critical ad dollars from the Menlo Park giant appears extremely unlikely. Hence, we continue to believe that Facebook stock is the best investment in the social media space and the SnapChat IPO will do little to change this fact.
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