Should Facebook Inc Just Buy Snap Inc.?

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FB stock - Should Facebook Inc Just Buy Snap Inc.?

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When Facebook Inc (NASDAQ:FB) first tried to buy Snapchat for $3 billion in 2013, many pundits thought Snap Inc. (NYSE:SNAP) should have agreed to the offer. Of course, failing to make the deal hasn’t hurt FB stock, and SNAP — which has a $23.2 billion market cap — probably doesn’t mind either.

If Facebook wanted to do the deal now, though, it would be an incredibly expensive acquisition — the biggest in Facebook’s 13-year history, even bigger than WhatsApp in 2014.

But it would move a major competitor from the field of battle.

Do the positives of getting rid of an irritating competitor help Facebook stock and outweigh the fact that FB would be paying eight to 10 times what it offered SNAP back in 2013?

The answer to that question isn’t nearly as obvious as investors might think. It really depends on why Facebook wanted Snapchat back in 2013 … and why it would want it today.

Facebook and Snapchat: A Brief History

When Facebook first approached Snapchat co-founder Evan Spiegel in late 2012, it was, according to Spiegel, to scare him and co-founder Bobby Ryan into selling. Spiegel told Forbes in a 2014 cover-story profile that Mark Zuckerberg warned them: Facebook was going to release its own photo app called Facebook Poke that would blow Snapchat out of the water.

That didn’t happen. In fact, Facebook Poke was an unmitigated disaster.

Zuckerberg wanted to buy Snapchat to strengthen its teenage audience, which was slowly drifting away from Facebook. Something like 26% of American kids aged 18-29 was using Snapchat at the time — a remarkably high capture rate in this all-important demographic.

Snapchat’s co-founders could smell fear on the part of Zuckerberg, but also an opportunity. It’s not unlike Zuckerberg saying no to any number of offers over the years for Facebook, several at more than $1 billion during a time when the social media giant didn’t have much revenue.

Flash forward to the present.

Should Facebook Make a Move?

Analysts believe that Facebook could still make an offer for Snap despite the fact its valuation is now much more expensive than in 2013. That’s because little has changed when it comes to Facebook’s glaring weakness: people under the age of 30.

FB stock chart view 1

“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.” wrote FBN Securities analyst Shebly Seyrafi March 9, initiating coverage of the recent IPO. “Remember that FB paid $21.8B for WhatsApp, a company which, although it had more users than SNAP, was not generating any real revenue.”

More importantly, the analyst goes on to remind investors, is that buying Snapchat at the current inflated valuation would eliminate a significant threat to its business. It’s the old addition by subtraction argument.

And why not?

Facebook has $29.4 billion in cash and marketable securities and no debt. It has introduced four different Snapchat clones in the past two years; the latest being Messenger Day, which is thought by social media experts to be a blatant ripoff of Snapchat Stories.

The biggest problem for Facebook is finding new places to display ads other than on its flagship app, which is close to capacity. Copycat or not, monetizing its Messenger app would deliver much-needed revenue growth at a time when FB stock really needs to provide investors with some light at the end of the monetization tunnel.

So, the question Facebook has to ask itself is whether its internal efforts to copy Snapchat are enough to match or exceed Snap Inc.’s future revenues. If 100% certain that they are, buying Snapchat at any price would be a waste of money.

However, if the answer is no or Facebook doesn’t have a definitive answer, then it’s a resounding yes.

Bottom Line on FB Stock

Either way, if you own FB stock, I don’t think you should be selling anytime soon regardless of what Facebook decides.

My inclination would be to wait and see what happens at Snapchat. After all, it currently doesn’t make any money and should things not go as planned over the next 12-24 months, Facebook would be able to buy it for much less at that time.

Besides, the guys at Snapchat already said no once. It would be really embarrassing if they said no a second time, given the dollars Facebook would be throwing at them.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/should-facebook-inc-fb-just-buy-snap-inc/.

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