Facebook Inc’s (NASDAQ:FB) move to win over Snap Inc’s (NYSE:SNAP) users is imperative. Last month, the social networking giant added Stories, a Snapchat feature, on FB Messenger. Both WhatsApp and Instagram have the disappearing post function on their apps. Snapchat’s threat of quarterly sales exceeding four-fold will hurt Facebook’s stickiness with its users. Any drop in usage would scare away its major advertisers. Facebook stock does not need to do much to keep tame Snapchat.
SNAP is not profitable, so growing pressure on its app will push its losses higher.
The declining user growth for Snapchat suggests that either its users stopped instant messaging or that they moved to another platform. Given that Facebook reported strong active user growth in its last quarterly report, it is probably taking Snapchat’s users.
FB stock has a geographical advantage over Snapchat. Facebook has the majority of young people in over 180 countries. Conversely, Snapchat is exhibiting strong growth only in North America. The company is hardly a threat to Facebook stock in that regard. Still, Snapchat’s strength in the North American market is scary. After all, it brings the highest revenue per user for FB. That is why the company must continue adding new features to ward away SNAP.
Facebook Stock: The Moat Will Get Bigger
The chances are good that FB will build improved WhatsApp, FB Messenger and Instagram apps. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) spent significant (but publicly unknown) amounts of money into research and development to launch Google+. Unfortunately, the social networking site failed to leverage its YouTube and Gmail user base. Even worse for Google was that users forced the site to separate YouTube from Google+ in 2015.
If Snapchat’s valuations continue plunging, Facebook could consider buying the company outright. The messaging site has a unique feature set that appeals to young millennials. If FB fails to replicate Snapchat’s growth, owning the app would deepen its moat in the messaging services market. Facebook’s duplication of Snapchat features has risks similar to Google+’s failure to replicate Facebook.
However, FB may decide Snapchat is not enough of a threat to hurt its business. On its site, the news feed is a key tool that keeps its users coming back. Following the logic that real-time news draws users, Facebook would be better off buying Twitter Inc (NYSE:TWTR).
Twitter is hovering near yearly lows because investors have no faith that it will reaccelerate active user growth. The company failed to win a deal to stream NFL games. Instead, Amazon.com, Inc. (NASDAQ:AMZN) will stream the games, after paying the league $50 million for the rights to do so.
Bottom Line on FB Stock
Facebook does not need to make sweeping changes on its site or any of its messaging apps to boost its user engagement. Advertisers are willing to pay more since they are allocating more of their budget on FB ads.
Snapchat’s phenomenal growth in the last few years in the developed markets might threaten Facebook stock, but Snapchat is bleeding money and unable to outpace cloud services costs with Google through higher revenue growth from ad sales.
FB could do nothing to improve its apps and it would still retain its market share. Still, with management feeling some paranoia, the latest app improvements should prevent the company from losing any of its users to the competition.
