Would Facebook Inc. (FB) Really Want To Buy Snap Inc. (SNAP)?

The chance of a potential buyout by Facebook Inc. offers support for Snap Inc. stock. But Would Facebook really want to buy Snapchat?

Would Facebook Inc (FB) Really Want To Buy Snap Inc (SNAP)

Venice, California, based Snap Inc (NYSE:SNAP), parent of the popular photo-sharing app Snapchat has been listed on the NYSE for less than a week. In the week immediately following the Snap IPO, a number of Wall Street firms issued initial commentary on SNAP stock. And well, the Wall Street commentary has been far from encouraging for SNAP bulls. The latest to join this deluge of Wall Street chorus was Shebly Seyrafi from FBN Securities, who believes that Facebook Inc (NASDAQ:FB) could be interested in buying out Snapchat. But Would the Menlo park, based Social Networking giant really consider making such a bid?

A $20B Snap Valuation Could Attract Facebook

FBN Securities analyst Shelby Seyrafi initiated Snap stock at a hold rating with a $23 target. More interestingly, the analyst believes that a per share price of $14, which would equate to a $20B valuation, is a floor for the SNAP stock. Why? Well, a $20B valuation could get Facebook interested, believes the Technology & Internet Research analyst at FBN Securities. Seyrafi believes Snapchat is a "highly innovative" company with an attractive demographic user base. As per the analyst, the photo sharing platform has been successfully drawing ad dollars away from Twitter (NYSE:TWTR), the San Fransico, California-based micro blogging platform.

As reported by Barron's Teresa Rivas, the analyst wrote: "One of the key points that the bears on SNAP may be missing is that we believe that FB would love to acquire the company, and it could be willing to pay at least $20B+ ($14/share) for the asset. If this is so, then investors in SNAP effectively have a “put” at around $14/share. Remember that FB paid $21.8B for WhatsApp, a company which, although it had more users than SNAP, was not generating any real revenue. There are several reasons why FB might make a bid for SNAP at the right price: 1.) FB already tried to acquire SNAP (for ~$3B in 2013), and 2.) FB has the balance sheet and cash flow to finance such a deal, and 3.) Such a deal would remove one of the few long-term threats to its business." So, Would Facebook really be interested in making a bid for Snapchat?

Facebook Bid For Snapchat

Let's first understand why Facebook acquired WhatsApp. WhatsApp is an instant messaging platform (communication tool), more like SMS (short message service) rather than a full-fledged social network platform like Facebook. Hence, the product was significantly different from the core Facebook product, catering to different needs of the users. And yes, WhatsApp was a leader in the instant messaging space.

On the other hand, the similarity between Instagram and Snapchat isn't hard to figure out. They are both photo sharing platforms with a similar user experience, which has converged recently, given the aggressive rate at which Instagram has been imitating features of the smaller photo sharing network.

Snapchat is also significantly smaller than Instagram. Instagram has 400M daily active users while Snapchat had 158M daily active users at the end of 2016. Would Facebook buy a smaller rival? Probably, if the company believed the smaller rival was a big threat. So is Snapchat a big threat? And, more importantly, can it continue to be a major threat to Facebook over the years? Well, we think the answer is now. Here is why. As pointed out in our earlier post titled "FB Stock: Will The Snapchat IPO Hurt Facebook Inc.", we highlighted how Facebook has been eating into the Snapchat growth story. The launch of Snapchat like features on Instagram had coincided with a sharp slowdown in user growth at Snapchat. On the other hand, Instagram has rocketed higher, going from strength to strength, both in terms of user growth as well as user engagement. Hence, it is hard to view Snapchat as a meaningful threat to Instagram over the longer term based on the recent events. Hence, Facebook buying Snapchat parent Snap Inc. at a $20B valuation currently looks remote, if not impossible. Therefore, we think a price of $14 per share is not much of a support for SNAP stock and investors would do well to stay away from Snap stock and buy Facebook stock, as we believe FB stock offers investors a significant margin of safety.

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Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

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Comments on this article and FB stock

I Love the AmigoBulls website. Great recommendations. RH
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Thanks for the kind words. We will continue to our efforts to bring the best to our readers.
You're right............SNAP will go down, down, down.
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Thanks for stopping by to read. Yes, it is hard to sustain the kind of valuations Snapchat currently trades at. Hence, the downside risk is high compared to the upside potential.
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