The Facebook Inc (FB) Killer

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May 11, 2016 4:15pm ETF BASIC NEWS

facebookMarshall Hargrave:  Facebook (NASDAQ: FB) has been unstoppable.


Its stock is up 50% in just the last year, and is now up more than 200% since its 2012 IPO.

Facebook investors Snapchat threat

For investors and marketers alike, Facebook has been the best investment around when it comes to social media. The likes of Twitter (NYSE: TWTR), LinkedIn (NYSE: LNKD) and Yelp (NYSE: YELP) have all seen their stock prices tumble by 35% or more in the last 12 months.

Just last month, Facebook crushed earnings estimates by reporting $0.77 per share, topping estimates of $0.62. Needless to say, the stock soared 10% on the news and is now trading at all-time highs.

But are the good times over for Facebook investors? There are worries that the easy money in online advertising is over as more mobile applications flood the market.

The online marketing game is getting fierce and companies are getting more aggressive. Twitter has inked a deal to live stream NFL games and Snapchat will be showing Summer Olympics highlights fromComcast’s (NASDAQ: CMCSA) NBC network. Snapchat has also been taking advantage of the presidential election season, which comes after it brought on a political ad salesman last year.

The Facebook Killer

While most were writing off Snapchat, it’s been taking over high schools and college campuses. Now it’s found its way into corporate board rooms, with companies scurrying to figure out how to use Snapchat to market their business.

Privately held Snapchat expects to bring in more than $300 million in revenue this year. It took them just four years to hit this mark – a similar feat as Facebook. However, Snapchat is now valued at $16 billion, topping Facebook’s $15 billion valuation when it was generating $300 million in annual revenue.

Snapchat recently overtook Twitter when it comes to installations on Android devices in the U.S. Snapchat is now installed on 22.7% of Android devices, passing Twitter’s 21.8% mark.

Snapchat admittedly still has a ways to go before catching Facebook, which is on 68.4% of Android devices. But whether Facebook investors want to recognize it or not, Snapchat’s success is bad news for the Facebook platform. Both Twitter and Facebook are likely losing users and potential viewers to Snapchat, especially as it goes more mainstream.

Already, Snapchat has more than 100 million daily active users, with over 60% of those creating content every day. Its users watch 10 billion videos every single day.

And what’s particularly interesting about Snapchat’s 10 billion video-view number is that Facebook only gets 8 billion video views a day – but Facebook has 10 times the daily users.

Facebooks Answer

Facebook bought photo- and video-sharing company Instagram for $1 billion in 2012. It was a highly controversial purchase, but has proved quite advantageous. Facebook has now extended the time limit for its Instagram videos from 15 seconds to one minute, presumably in an effort to combat Snapchat. Facebook has yet to break out any advertising revenue numbers for Instagram, so it’s still tough to tell exactly how the photo app is doing.

Now, the big solution for Facebook’s Snapchat problem, thus far, has been Facebook Live. This is Facebook’s live-streaming app, but it’s unclear how broadcasters will make money from it over the long term.

There’s also a big difference between how Facebook is going after video and how Snapchat is doing it. Snapchat is requiring guaranteed minimums before letting media companies appear in its Discover section (its digital magazine, so to speak).

If a media company doesn’t sell any ads, Snapchat still gets paid. It’s interesting that Snapchat already has enough pull to demand minimums. Facebook, meanwhile, has been paying publishers to use its Facebook Live platform.

Snapchat currently makes money from its Live Stories service (where advertisers pay to sponsor a particular event) and its Discover section (which generates revenue on ads sold alongside that content). It is also selling custom geofilters.

How to Capitalize

The IPO market is drying up a bit, so it might be a while before you can get your hands on some Snapchat shares. You could short Facebook, but that can be risky and expensive.

But then there’s the idea that Facebook could just buy Snapchat. With $18 billion in cash and virtually no debt, it’s certainly a possibility. Facebook CEO Mark Zuckerberg has said, “Facebook has been built by a series of bold moves, and when I look out at the future I see more bold moves ahead of us than behind us.”

Recall that Facebook tried to buy Snapchat for $3 billion in 2013, but Snapchat CEO Evan Spiegel rejected the offer. It’s likely that Spiegel still has big plans for Snapchat (an eventual IPO included), to the point that he’s still not interested in selling.

The worst of it for Facebook is that Snapchat operates entirely on mobile devices. So continued success from Snapchat could really cut into Facebook revenues. The bulk (over 80%) of Facebook’s ad revenues are from mobile advertising.

There is, however, a potential opportunity for investors. The key is to look at companies that are leveraging innovative technologies and platforms to step up their marketing game. For most of the last decade, many media companies haven’t really had a digital strategy to target millennials with mobile apps. However, some media companies are finally waking up.

Viacom (NASDAQ: VIAB) and other like-minded media companies have to stop thinking of themselves as TV companies. Viacom, the owner of MTV and Comedy Central, linked a deal earlier this year with Snapchat that made it the only TV company to be able to sell advertising on Snapchat’s behalf.

The name of the game is eyeballs, and there are only so many hours in the day. Facebook should be worried about any company that can take user’s attention away from its apps. Meanwhile, there is an opportunity for companies like Viacom that can use Snapchat’s content to reach millennials.

This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.


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