Surprise, surprise. Snap Inc (NYSE:SNAP) stock is falling big today after reporting what were pretty miserable numbers for the second quarter of 2017. Revenue growth slowed meaningfully versus the first quarter. User growth peddled along at just 7 million new users in the quarter (Instagram Stories’ current growth pace implies about 75 million new users each quarter). Average revenue per user remains exceptionally weak. Expenses ballooned. Net losses widened.
All in all, Snap stock is down big: About 51% below its $17 IPO price.
But the bulls aren’t giving up, and ironically, they point to the company that’s killing Snap as the reason why SNAP stock could have explosive growth from these levels.
Facebook Inc (NASDAQ:FB) also struggled in its early trading days. But it was around this stage of the game (~100 days after its IPO) that Facebook’s fortune changed.
Indeed, if you look at the price charts for the two equities, you might be convinced that SNAP stock may be a turnaround in the making. After all, its first 100-day trading trajectories are very similar.
But you should forget those thoughts. To quote Paul Meeks, chief investment officer and portfolio manager at Sloy Dahl & Holst:
“I think Facebook is the one to buy, and if you think about Snap, slap yourself and just buy some more Facebook.”
Snap is not the next Facebook, and SNAP stock will do nothing but grind lower.
Here’s why.
Snap Has Too Much Competition
The biggest reason why Snap won’t become the next Facebook is because of competition.
When Facebook rose to social media stardom, it didn’t really have anyone to compete with. There was MySpace, but that platform was pretty much all but dead by the time Facebook really got rolling. Twitter Inc (NYSE:TWTR) was around, but it didn’t have much usage overlap with Facebook. Twitter was for conveying emotions and happenings in short blurbs. Facebook was a more complete platform with longer-from content, pictures and videos.
In other words, the road for FB from niche, college-focused social media platform to the world’s largest congregation of people ever wasn’t muddied by competition.
But Snap’s road is filled with competition. And that competition is beating Snap at its own game.
At the end of the day, the one thing that is more important than anything else in the social media world is users. The more users you have, the more reach you have. The more reach you have, the more data you have. The more reach and data you have, the more advertisers are attracted to the platform.
Following that logic, why would any advertiser want to go to Snapchat instead of Instagram? Snapchat has far less users, and presumably, almost all of Snapchat’s users are also on Instagram. So if you are an advertiser and want to reach the Snapchat demographic, why not just go through Instagram Stories and get an additional near 100 million views as well?
And that’s why Snap won’t become the next Facebook. Facebook essentially pioneered the era of digital advertising. Consequently, advertisers couldn’t ask those questions 5 years ago. There was no platform bigger than Facebook with more reach among a similar demographic. It just didn’t exist.
But for Snap, it does, and it’s called Instagram.
Bottom Line on SNAP Stock
Bulls want to keep drawing comparisons between early SNAP and early FB. Both were killed in their first 100 days as a publicly traded company. Both CEOs vowed not to sell shares while the stocks tanked. Neither company was profitable on a GAAP basis in their early days.
But those comparisons need to stop. Here is a little dose of reality for those still believing SNAP will turnaround like FB.
For those who follow financials, FB reported a non-GAAP net profit of $295 million in its first quarter as a publicly traded company. SNAP reported a net loss of nearly $200 million last quarter on a non-GAAP basis.
For those who follow stories, there was no Facebook before Facebook. But now there is a Facebook. That means whereas FB grew without friction in a largely untapped market, Snap is entering a highly competitive marketplace where it is one of the smaller fish in the pond.
For all these reasons, I remain bearish on SNAP stock. There is no Facebook-like bounce coming. Instead, investors should just expect more pain.
As of this writing, Luke Lango was long FB.
