Social media newbie Snap Inc. (NYSE:SNAP) surprised markets with a brief rally over the past few weeks. Data showing that the disappearing message service was forecast to chip away at Facebook Inc.’s (NASDAQ:FB) dominance in the space over the next few years gave bulls something to cheer about and added about 11% to the stock’s value between Aug. 11 and Sept. 18.
Predictably, however, the self-proclaimed “camera company” gave up the majority of those gains the following week. The trouble with SNAP is that the firm’s offerings aren’t all that different from its bigger and better financed rival Facebook.
Sure, Facebook is losing momentum among teens, but many of those users are abandoning the site in favor of Instagram, which is also owned by FB. Instead of letting SNAP take over as the only disappearing message service, execs at Facebook have been shamelessly copying Snapchat’s features — and it seems to be working.
Why Instagram is Better Than Snapchat
Instagram has upped its filter game and added a 24-hour, disappearing video and photo option called Stories in order to compete with SNAP. The copycat route appears to be working too — as of the end of August, 48% of new users were joining Instagram while 52% opted for Snapchat. That’s way up from the previous year when the figures were 22% and 78% respectively.
Perhaps the most troubling metric for Snapchat, though, is the number of influencers who are abandoning the platform in favor of Instagram. During the second quarter, Instagram saw its “influencer” (people with large followings and credibility within a certain niche) posts rise 11%, while the number of influencers posting on SNAP dropped 20%. It turns out that Instagram’s setup makes it much easier for influencers to track views and likes, something that helps them generate engagement. In order to hold on to its power users, SNAP will need to revamp its metrics to help users see what works and what doesn’t.
Many also believe that finding like-minded individuals and growing one’s following is much more challenging on SNAP than it is on Instagram. Instagram offers several ways to connect — via an “explore” tab, through groups or even just by appearing in another influencer’s profile.
SNAP, on the other hand, doesn’t offer as many growth opportunities, which could add to the mounting list of reasons some influencers switch to Instagram.
Managing Expectations
I find it hard to get behind Snapchat because the firm isn’t doing anything that can’t be copied — which is exactly what is happening. However, even if you think that SNAP is on its way up, the expectations that are baked into the stock are extremely lofty. At its current valuation, SNAP has a market cap of $16.4 billion, yet the firm’s financials show that it’s nowhere near turning a profit.
Right now SNAP is trading at 26 times its sales — a price you should only be willing to pay if you have a lot of confidence in SNAP’s ability to grow its user base and monetize them effectively. By comparison, FB trades at just 15 times its sales and Twitter Inc. (NYSE:TWTR) has a price-to-sales ratio of just 5.3.
As such a brand new company, I’m not saying SNAP has to be immediately profitable, but there has to be a light at the end of the tunnel and I’m just not seeing it. Advertisers have a hard enough time engaging folks in the short time their customers might watch their ads, they don’t need the added hassle of not being able to effectively track how well their content is performing. Viacom, Inc. (NASDAQ:VIA) has already decided to abandon its Snapchat channel and we may see more big names doing the same if the platform doesn’t improve.
The Bottom Line on SNAP
Snapchat has very little potential to speak of. The firm has never made it clear to investors exactly how it plans to make money from its user base.
In fact, reports say that the firm hasn’t even really told its own employees how it plans to make money. Even if SNAP came out with a great monetization scheme that blew investors away over the next few weeks, there’s also the fact that the firm appears to be losing ground to Instagram.
The Snapchat experience is easily replicated and, without any kind of moat, SNAP is unlikely to go very far.
As of this writing, Laura Hoy was long FB.
