TheStreet.com’s Brian Sozzi last week wrote that Facebook Inc (NASDAQ:FB) is “going to pound Snap into the ground with new services and better data utilization, causing Snap to beg for mercy.” Clearly meant more for effect — and a laugh — than as a literal prediction, his point is nevertheless well taken. That is, Snap Inc (NYSE:SNAP) poses no threat and should be of little concern to owners of FB stock.
Thing is, while the colorful prediction was intentionally over the top, Sozzi may be more right than even he realizes. When all is said and done, Facebook is likely to end up humiliating Snap, the parent company of messaging platform Snapchat.
And Facebook CEO Mark Zuckerberg just flipped the switch.
Cultivating an Untapped Opportunity
With its provocative headline — Facebook Is Going to Stomp on Snap’s Face Until It Begs to Be Bought for Dirt Cheap — clearly no punches are being pulled there. However, the assessment does beg the questions of how and why it’s going to happen now when it hasn’t happened yet.
For those users of Snapchat and both of the messaging platforms Facebook operates (Facebook’s original Messenger as well as Instagram), you may have noticed something curious about Messenger: you’ve probably not seen as many ads there, if any. That’s been by design, but that’s about to change. See, after successful testing in Australia and Thailand earlier this year, Zuck is reportedly close to hitting full throttle on dropping ads into Messenger conversations.
At first blush it may seem irrelevant. Online messaging is essentially a commodity now, and besides, Snapchat is young and the bulk of its growth is in front of it. Facebook is soooo yesterday.
That point of view is alarmingly short-sighted though, and a little naïve.
In many regards this mostly untapped venue opens up a whole new opportunity at a time when Facebook itself is running out of place to insert advertising. Messenger itself boasts 1.2 billion regular users. Sure, Facebook’s Messenger may be old-hat, but with the number of Facebook users recently topping 2 billion and still growing — and still engaged — the number of eyeballs and hours on Messenger is rising too.
The real threat to Snapchat and upside for owners of Facebook stock is that it offers choice, and a chance to make use of more complex and very targeted ad campaigns. Between its three platforms and armed with more than a decade’s worth of data-gathering on all of its users, Facebook can deliver an impressive, effective cross-platform solution to advertisers, with multiple opportunities to sell a product or service to an individual.
Snapchat, conversely, is a one-dimensional with considerably less customer data and considerably less experience gathering that data. As of the latest tally, only 166 million users log into Snapchat every day, and the growth of that headcount is slowing.
That’s just not enough scale for the average advertiser to get excited about when a far more proven Facebook offers a three-pronged opportunity.
And it’s not as if Snap is apt to experience some sort of marketing epiphany that will suddenly make it competitive with Facebook. The recent IPO’s lead underwriter Morgan Stanley, which was generally expected to remain bullish on the stock it touted for at least a polite amount of time, recently downgraded SNAP writing “Our latest industry conversations indicate many advertisers are struggling to develop [Snap] ad units with sufficient completion rates and consistent return on investment. Lower ROI holds back incremental ad dollars.”
And that was from an investment bank that has to hold up its past IPOs as a means of securing future underwriting business.
Bottom Line for Facebook Stock
Not that many FB stock holders were terribly concerned anyway, but to the extent Snapchat felt like a threat to the popular social networking site, it (still) isn’t anywhere near that threat, and probably won’t be anytime soon… if ever.
In fact, Sozzi’s stance may be even more optimistic than is merited. He’s assuming a suitor would eventually emerge and scoop up the tattered pieces of Snap for a song. There’s a distinct possibility no buyer would even want to bother taking on what’s sure to be a complicated, possibly-unfruitful project.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.