It’s really tough to find anything seriously wrong with Facebook Inc (FB). The company’s revenues and profits continue to grow at a robust pace. And yes, Facebook stock has been a nice winner, notching a 41% gain during the past 12 months.
Yet the consumer tech world can be precarious, as seen with the many other former darlings like Yahoo! Inc. (YHOO), Zynga Inc (ZNGA), AOL, Groupon Inc (GRPN) and, well, MySpace.
If anything, the biggest threat to Facebook stock is that its offerings could lose the interest of the younger demographic, which is certainly fickle.
Snapchat Holds the Lead
Of course, the company that has been a real thorn is Snapchat, which the young crowd still considers to be very cool. Consider that FB has made two multi-billion-dollar offers for the startup already. But it seems that Snapchat fancies itself as a next-generation mobile juggernaut whose goals probably include a public offering.
So FB has been fighting back. But the efforts have so far been underwhelming. For example, FB has launched apps like Poke and Slingshot that have been duds. They were just simple knockoffs and savvy users quickly saw the ruse.
Yet perhaps the better approach is to crank up the M&A machine. After all, this has worked already, such as with stellar deals for companies like Instagram and WhatsApp.
Interestingly enough, as for the fight with Snapchat, the most interesting FB deal came last week: the purchase of Masquerade. The startup allows users to make funky transformations of photos and videos, such as swapping a headshot with a cat or turning your eyes into cartoons. No doubt, this is the kind of stuff that is a hallmark of Snapchat.
More importantly, Masquerade has shown tremendous viral growth. According to Apptopia, the app is getting a over 350,000 downloads a day on the Apple Inc. (AAPL) and Alphabet Inc (GOOG, GOOGL) app stores.
Not bad for a company with negligible funding and only three employees!
While the Masquerade app may seem goofy and downright frivolous, it is actually based on sophisticated technology development, which has been ongoing since 2010. Just some of the approaches include “machine learning, face detection and tracking, facial expression recognition, 3D-graphics and visual effects,” according to a blog post from the company.
Bottom Line on Facebook Stock
Snapchat gets a sizzling 8 billion video views a day, which is about what FB gets. What is even more amazing about this is that Snapchat has a smaller user base.
In other words, the app gets tremendous engagement, which will likely mean that the company should get a nice chunk of the mobile advertising revenue opportunity.
So Snapchat is definitely a threat, and this is why FB needs to find ways to fight back. The good news is that FB has been proactive, such as with its launch of a livestreaming service (which is similar to Twitter Inc’s (TWTR) Periscope). It also looks like the company plans to pay celebrities and athletes to join the service.
But again, M&A may be the critical factor. And the track record for FB is certainly standout. Hey, when the company bought Instagram, the user base was 30 million but would eventually hit 400 million. As for WhatsApp, the user based has more than doubled in the past couple years, up from 450 million.
So it’s a good bet that FB has been diligent with the Masquerade deal and should be able to find ways to make it even more successful.
And given the traction of Snapchat, the dealmaking has probably just begun.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
