It’s not exactly like taking candy from a baby, but the massive decline in Snap Inc (NYSE:SNAP) is being celebrated by short sellers who saw this fall coming from a mile away. I won’t go so far to say “I told you so,” but you were warned. And with SNAP stock still under heavy selling pressure, calls for Facebook Inc (NASDAQ:FB) to put SNAP out of its misery are growing. But does it make sense for FB stock?
Fresh off its 44% one-day surge last Thursday, SNAP stock closed Tuesday at $21.44, plunging as much as 30% from its high Friday of $29.44. The parent of popular messaging app Snapchat is projected to lose money for the next couple of years. But that was the case a week ago, too.
On Monday, Laura Martin, analysts at Needham & Company, rated SNAP stock a “sell” and slapping it with low target range of $19. She’s one of five analysts will a sell rating.
It seems analysts have begun to look beyond the initial hysteria to now realize Snap’s slowing user growth puts it closer to the reality of Twitter Inc (NYSE:TWTR), which is trading more than 40% below its own IPO price from a couple of years ago.
Still, Snap’s suffering could be Facebook’s gain. Snap’s platform and its existing user demographic have tons of value to sustain Facebook’s ad growth objectives.
Since its launch, the Snapchat app has consistently focused on introducing new and unique features, making it widely popular among teenagers. The company claims the app had 158 million daily active users per day at the end of 2016 — majority of which are between 18 and 34 years old. These totals mark a 48% year-over-year increase. And the fact that the daily users visit more than 20 times per day (on an average 30 minutes per visit) could be a boon for marketers.
Beyond being a revenue driver for Facebook, by acquiring Snap, FB stock would be eliminating a potential threat. This is something it has strategically done with acquisitions of both Instagram and WhatsApp, which have become core to Facebook’s growth. In that regard, CEO Mark Zuckerberg has been brilliant.
The question, then, at what point (or valuation) does it make sense for Facebook to pounce?
As of Tuesday’s close, Snap had a market cap of $25 billion, which analyst seems to consider overvalued. And with an average price target of $15.50, which implies a target market cap of around $20 billion, Facebook may want to wait. But does it want to risk losing Snap to Microsoft Corporation (NASDAQ: MSFT) or perhaps worse, Alphabet Inc (NASDAQ:GOOG, NASDAQ: GOOGL)?
Bottom Line for FB Stock
The many options still available to Facebook makes FB stock one that should be owned, not traded. Combined with accelerating ad-revenue growth, Facebook’s $6 billion stock buyback and its mobile assets, FB stock should reach $160 in the next 12 to 18 months, driven by projected year-over-year EPS growth of almost 30%.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
