Markets will feel euphoria and bullishness when Snapchat trades publicly this week. The stock IPO price of $14 to $16 sets a valuation of between $16 to $18.5 billion for the messaging site. At less than one-tenth that of Facebook, Inc’s (NASDAQ:FB) valuation, SNAP looks like a good deal. But if you study the competition more closely, you’ll realize that investors should hold Facebook stock instead.
In addition to adding Snapchat-like features in WhatsApp (through disappearing posts) and Facebook messenger, Facebook may add buttons that ease buying food, tickets or making restaurant reservations.
WhatsApp’s latest enhancement now allows for users to share photos or videos. They may draw, add a caption or include emojis to these posts, which are visible for just 24 hours before they disappear.
Betting against Snapchat and for FB stock requires Snapchat’s fad drying up. If the millennial user group abandons the app in favor of Facebook Messenger, SNAP’s chat will collapse. Facebook stock trades at a forward price-to-earnings ratio of around 20x. It grew earnings over 60% in the last five years and earnings-per-share this year will grow by over 20%.
By stark comparison, SNAP will not make a profit and probably never will. Unless Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) cloud computing costs fall, Snapchat’s revenue will never exceed costs. FB continues to make money as mobile usage grows quarter after quarter.
FB Stock: Growth Ahead
WhatsApp has over 1 billion users, with Snapchat users likely using this app concurrently. If Snapchat’s user base erodes, Facebook will be the first company that benefits from the shift. There are risks to this forecast: Blatantly copying Snapchat’s features may look too “me too” in the eyes of the Snapchat fan base.
The strategy may backfire, encouraging users to stop using WhatsApp or Facebook Messenger at all.
However, FB’s presence in messaging is only a part of the company’s growth story. Advertising is the main growth engine. In 2016, total revenue grew 53% year-over-year to $8.6 billion. The company ended the year with over 4 million advertisers on Facebook. Over 500,000 advertisers buy ad space on Instagram. The reason for the allure is due to the platform’s reach to over 1 billion people.
FB invested in the ad platform last year. Through Dynamic Ads, advertisers may auto-promote products from their entire catalog. The development does not stop there. The company knows that what matters is raising the visibility of its ads to users. COO Sandberg said:
“We really believe that at the end of the day what matters the most is all the way through to sales. What matters the most is the A/B test that these people saw ads on Facebook and Instagram, these people didn’t, and here’s the sales lift. And all of the other metrics, although important and we’re working hard, are proxy metrics, and those metrics are going through a platform shift that we need to work on.”
The more effective ads become, the more often advertisers will return to run ad campaigns. On the
Bottom Line on Facebook Stock
FB is making billions in advertising revenue and the growth will continue in the foreseeable future. Snapchat’s big IPO will draw investors, but the event does not change the fundamentals for the Facebook stock price and the company’s overall potential. The company is too big. Its growth in messaging will continue. Even its foray in virtual reality will pay off. The 10-year plan behind FB stock will only add another source of revenue for the social networking giant.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.