- Facebook may be about to experience real competition for the first time.
- This comes at the same time that high hurdles will make it easier to stumble.
- One analyst is highlighting and quantifying the concern.
Facebook (NSDQ:FB) had a fantastic Q2 and investors were expecting it. The stock traded up as earnings approached and then when high expectations were exceeded, it jumped again, gapping up another 4%. The report was met with widespread acclaim but through the frenzied shouting of sell side analysts, a question posed by the Jefferies analyst, Brian Pitz, was widely overlooked. Are Facebook users migrating to Snapchat?
Nobody can deny the company's impressive beat driven by the soaring mobile ad business, Instagram ramping quickly, and FB narrowing its expense outlook. But 2017 now looks to be more challenging. The comps become difficult and new guidance implies stabilization of ad-loads in mid-2017. The Jefferies analyst takes the issue one step further and asks if "Snapchat's rapid rise will impact Instagram's growth trajectory"?
Competition From Snapchat
Snapchat has shown remarkable growth. In just a few years, it has reached 41% of 18-30 year olds in the U.S and appears to be rapidly growing among millennials. This issue forces the question, will this platform impact Instagram's growth rate since they are both focused on a younger demographic? If content sharing and consumption shifts to Snapchat, what does that mean for the advertising potential of Instagram? When will this impact pricing?
Some interesting Snapchat statistics:
- Early in '16 Snapchat had 150MM Daily Average Users which was up 50% over 2015
- ComScore estimates that 76% of Snapchat's users are less than 34 years old
- Snapchat has stated that 41% of 18-34 year olds in the US use Snapchat daily (the top 15 US TV networks only reach 6% of the same demographic)
- Snapchat is currently ranked higher than Facebook, Messenger, and Instagram in Apple's US App Store.
Snapchat's success seems to be derived from its ephemeral messaging. Since messages disappear, it encourages users to share openly and regularly. However, Facebook isn't ignoring the issue, its new Stories feature is aimed at increasing the level of personal sharing. Photos and videos added to an Instagram Story will not appear on users profile grid or in feed, and will disappear after 24 hours. However, unlike Snapchat, Instagram users can select who can and cannot see a story. The question is, with 150 million users already on Snapchat, is it too late to stop the flow?
This competition is coming at a time when it will be more difficult for Facebook to hit higher hurdles. On the call, management said “we anticipate ad load on Facebook will continue to grow modestly over the next 12months, and then will be a less significant factor driving revenue growth after mid-2017". The CFO mentioned that the slowdown in ad load growth is already incorporated into the ~30-31% revenue growth estimate for 2017. But is it?
Facebook has been a fantastic investment since it went public only four years ago (May 2012) but the only web based companies to thrive over the long term have been Amazon and Google, both of which provide unique goods or services. Facebook, on the other hand, relies on the popularity of user generated content regularly drawing people back to the site. At the same time, it is cluttering up timelines by inserting more ads but attracting a greater amount of online spend as competitors fall by the wayside. Snapchat could be Facebook's first real competitor. Worse, it comes at a time when declining add load growth makes Facebook more likely to stumble over a growth hurdle.