Snap Inc (SNAP) Should Sell Out to Alphabet (GOOGL)

In light of SNAP’s awful earnings report, the company needs to act fast.

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor
Alphabet Inc GOOGL Stock Will Continue to Rise... After a Brief Pause

Snap Inc (NYSE:SNAP) continues to sink following its discouraging second-quarter earnings report. But fear not, SNAP stock holders … there’s still hope. All CEO Evan Spiegel has to do is something he has disparaged since the company was founded: sell out … to Alphabet Inc (NASDAQ:GOOGL), no less.

Alphabet Inc (GOOGL) Should Buy Snap Inc (SNAP)
Source: Shutterstock

A Business Insider report earlier this month said Alphabet Inc (NASDAQ:GOOGL) floated a hefty $30 billion offer for Snap last year, and there might have been other more informal talks beyond that.

If that’s the case, it’s time for Spiegel to rethink things. For the sake of SNAP stock investors, taking the money from Alphabet — if it’s still on the table — is the best option now.

Snap’s latest earnings report highlights the need for drastic action.

Revenues of $182 million came in short of Wall Street expectations for $186.8 million, and a net loss of $366 million was far wider than the $115.9 million that analysts expected Snap to lose.

But most importantly, user momentum continued to decelerate. In Q2, SNAP added 7.3 million daily active users (DAUs) to fall under the consensus for 8 million. A year ago, the company was adding more than 20 million users per quarter!

The big issue is Facebook Inc (NASDAQ:FB), which has turned Instagram Stories into a Snapchat-copying juggernaut. That service is adding 50 million users per quarter … and at least one or two Snapchat features that often, too.

But the strategy is working, and is reminiscent of what Microsoft Corporation (NASDAQ:MSFT) pulled off at the dawn of the Internet revolution. The company leveraged its Windows platform to pulverize Netscape, which would go on to lose much of its market share within a few years.

Snap & Alphabet

While Google+ ended up fizzling, the addition of a new a social network should provide fuel for GOOGL stock. Advertisers want to target users based on demographics and other valuable data. Facebook has proven this convincingly, as seen with the continued high rates of growth for its revenues — and juicy profits.

This should concern Alphabet shareholders. FB is not only catching up to the company in terms of revenues, but is making headway into key Google markets, such as video. This week, in fact, Facebook launched a new “Watch” video platform to better monetize the space — and it’s clearly a shot at YouTube.

Yes, Alphabet could try to create its own social network again, like it did with Buzz and G+. But at this point, an acquisition seems the safer bet.

A combination of SNAP and GOOGL would provide important synergies. Despite Snap’s issues, the company still has a highly engaged user base with average time spent at about 30 minutes per day. The app also targets the much sought-after younger demographics of Gen Z and the Millennials. Snap also has a head start on short-form video content through its Discover feature.

Alphabet can clearly bring a lot of value to the table, too. The company can provide distribution through properties like Gmail, Search, Maps and YouTube. But GOOGL also can help with the Android versions and allow for quick penetration into foreign markets. Perhaps the biggest advantage is the proven advertising infrastructure, which can speed up the monetization efforts.

Bottom Line on SNAP Stock

Any potential buyout of Snap at this point would (and perhaps should) draw skepticism, but I think a deal between Alphabet and Snap would end up being a good fit.

However, predicting M&A is a dicey venture. There are countless examples of where a deal should have been done, but management was either too short-sighted to see the play or too stubborn to make it.

Things are even more risky considering SNAP stock has no voting rights, which means an activist can’t agitate for change. The voting power is in the hands of the company’s co-founders, and so far, they’ve been resistant to acquisition advances.

But given the continued challenges and the seemingly constant decline in shares, management should get a jolt of reality soon. Action must be quick, though. When it comes to digital properties, things can come undone very quickly.

Tom Taulli runs the InvestorPlace blog IPO Playbook and operates, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2018 InvestorPlace Media, LLC