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Will Snapchat Become the Next Twitter or Facebook?

Zacks Equity Research

After months of speculations, Snap Inc., the parent company of social media mobile app Snapchat, finally got listed on the New York Stock Exchange last week. With this, arguments whether the company will become more like Facebook FB or turn to Twitter TWTR in the next few years, have heated up.

Notably, shares of the two established social media companies – Facebook and Twitter – have taken divergent paths since their respective Initial Public Offerings (IPO). At yesterday’s closing price, Facebook is up 261.6% from its IPO price; while Twitter is trading 40.2% down from its IPO price.

Undoubtedly, neither the company nor the stakeholders will ever prefer it to become like Twitter, which is witnessing declining user base, revenues and earnings. On the contrary, it will like to become more like Facebook or even better, which has seen a tremendous rise in user base, revenues as well as earnings.

Although, it will be quite early to forecast where the company will find itself after five years from now; the business model demonstrates both positive and negative aspects following the stock’s recent decline post IPO.

What Makes it More like Facebook

Snap is known for its social media mobile app – Snapchat – which was founded in 2011, and officially launched in 2012. The app allows users to take photos and record videos, as well as facilitate editing options and share the same with friends. However, photos or videos can be viewed for few seconds only and then they disappear, and also cannot be saved.

Since its launch, the app has been steadily getting popular among teenagers, thanks to its consistent focus on introducing new and unique features. Per the company, the app had 158 million daily active users per day at the end of 2016, which represented year-over-year growth of 48%. Of these, majority are between 18 and 34 years old. The daily users visit the Snapchat app more than 20 times a day, on an average, and spend over 30 minutes.

Although, the daily active user count is way lesser than Facebook’s over 1.20 billion, it has already surpassed Twitter’s over 130-million daily visitors. Also, the rate at which it is growing, it has the potential to reduce the gap with Facebook.

Going ahead, the best part of the company is that it has been able to monetize the app. The company does not follow the typical Internet advertising model of charging per click; rather it charges advertisers per day. The consistently growing daily active user base has been attracting more and more consumers.

Apart from this, the company’s Snapchat Discover feature has expanded its picture and video library, thereby attracting more and more advertisers. The feature also allows the company to partner with major events like the Oscars and Super Bowl. Discover currently accounts for a majority of the company’s advertising revenue.

It should be noted that the company registered almost a seven-fold year-over-year jump in its 2016 revenues, which reached $404.9 million from $58.7 million recorded in 2015. Going ahead, the company projects its annual revenues and daily active user base to reach approximately $2 billion and 221 million, respectively, in 2018.

Snap’s constant efforts in introducing new and unique app features, along with its innovative adverting ideas, will enable it in achieving its target.

Despite this, it will be far lesser than Facebook, which generated $27.6 billion revenues in 2016, and is still growing. However, if Snap achieved its target for 2018, it will certainly be closing its gap with Twitter which generated $2.5 billion in revenues and has been witnessing a slowdown in growth rate.

Why It May Fall to Twitter

Looking at the above discussion, it seems that Snap does look like Facebook. However, there are a number of challenges which may trouble it in becoming the next Facebook and put it in Twitter’s shoes.

The major threat comes from Facebook which introduced the new “Stories” feature at its Instagram app last year. This new feature allows users to post photos and video slideshows which disappear after a 24-hour period. Instagram stories directly mirror Snapchat’s own stories feature. Reportedly, after this launch, Snapchat has recorded a slowdown in its users’ growth rate in the second half of 2016.

The second major concern is that even after five years of journey, the company has failed to make itself profitable just like Twitter before its IPO. On the contrary, Facebook had made over $1 billion of profit in the fiscal year just before its IPO in 2012.

Furthermore, since the early days of Snapchat, this disappearing messaging app has been associated with sexting. Snapchat has also dealt with a few other embarrassing issues, including two different racially insensitive filters. All this may put the company in unnecessary controversies and bring in unwanted investigation.

Conclusion

Investors ideally vision Snap to grow like Facebook and not become Twitter. However, we believe that Facebook’s well established position in the social media industry, ever-growing user base and the popular Instagram service are significant threat to Snapchat’s growth prospects.

In addition, the company will have a tough task grabbing market share in the digital ad space, which is mainly dominated by Facebook and Alphabet GOOGL aka Google.

Want to learn more about Snapchat stock? Check out our recent podcast on SNAP with an IPO expert below!

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