Facebook (FB) has been on a tear in 2014, with FB stock up more than 30% since January. One of the more recent catalysts for the surge was strong Facebook earnings that reinforce the notion of continued growth and better monetization of users as time goes by.
But the run in Facebook stock is naturally followed by the question, “What’s next?”
After all, FB stock has been riding high thanks to sentiment and is now trading at nearly 40 times future earnings. As other high-growth tech players like Amazon (AMZN) have run into a wall amid investors demanding real profits, the same risk looms for Facebook stock if it can’t deliver in the future.
That’s why FB stock holders are looking beyond just the social media giant’s current advertising empire.
Enter the Facebook-Snapchat rumors.
Sure, there’s Instagram, acquired in 2012 for about $1 billion, and currently experimenting with advertising options. There are also more recent acquisitions of Oculus VR and WhatsApp, that as of yet don’t have much to offer in the way of revenue or profits.
But one of the hottest options for future growth that is bandied around Wall Street right now is the idea of Facebook buying Snapchat — for a price tag of as much as $10 billion — despite these other irons in the fire.
Facebook, SnapChat and Privacy
InvestorPlace commentator Tom Taulli has been closely watching the prospect of a Facebook-Snapchat alliance. Facebook has been looking to take on the fast-growing Snapchat in a variety of ways that include its Slingshot app, which offers secure messages that quickly disappear.
As Tom writes:
“Winning against Snapchat could be critically important for Facebook stock. The fact is that more people are getting concerned about having their digital life available to everyone. It can mean embarrassment, perhaps even losing a job or a spouse! But at the same time, people still want to communicate will their friends.”
This is an issue that plagues not just Facebook but also other tech giants like Google (GOOG). Just look at a ruling in Europe that guarantees people “the right to be forgotten” and is creating big headaches for GOOG when it comes to scrubbing search results.
As CEO Mark Zuckerberg likes to say, Facebook’s mission is “to give people the power to share and make the world more open and connected.” But increasingly, the idea of a public record for everything you do is rubbing many folks the wrong way.
Thus, Snapchat is a great hedge for Facebook when it comes to this trend — and a way to protect its flank from rivals that look to make communication more private, not more open. Building an in-house product could be expensive and ultimately come to nothing, so the purchase of Snapchat would be an instant win that many investors would cheer.
Snapchat Going Strong
Of course, a fashionable tech startup like Snapchat isn’t going to be cheap.
As reports at Bloomberg indicate, Snapchat just raised another round of funding that values it at about $10 billion — up significantly from previous reports of a $3 billion buyout offer from Facebook last year.
The fact Zuckerberg had already made a move for Snapchat is noteworthy, both to FB investors and to those just watching the space.
But the fact Facebook was rebuffed is even more telling.
Also, it’s worth noting that Zuckerberg has been making a lot of his deals lately using FB stock … but if Snapchat has the leverage it appears to, company execs and backers might want more than just Facebook shares in exchange for their high-growth company.
Whatever transpires, however, you can be sure that Snapchat will be a continued part of the conversation in the social media space and as mobile communication evolves.
It’s ironic that FB stock has run up so much on the idea of sharing and social media … but that a company committed to making your thoughts and messages disappear is the hottest thing on Wall Street right now.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.