Facebook vs. Snapchat: Will Facebook Crush Snapchat?

Facebook vs. SnapchatSnap Stock Isn’t Really a Threat to FB Stock

For more than two years, people have been telling me that Snap Inc (NYSE:SNAP) will topple the king of social media, Facebook Inc (NASDAQ:FB). During the Snapchat IPO, I wrote that this was ridiculous. Now that the Snap earnings are out, I feel like it’s time for a victory lap, because I was right—Facebook vs. Snapchat is looking like a first-round knockout.

That is no longer a controversial opinion.

At the time I wrote it, however, investors were in love with Snapchat stock. None of them grasped the dangers of investing in this odd little company.

Optimism felt like the default option.

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“Of course SNAP stock will be the next FB stock!” they would say. I never quite heard why it wouldn’t be the next TWTR stock though…

There’s no evidence that anyone can replicate the success of Facebook.

Run through the list, if you doubt it.

  1. MySpace: Fell victim to Facebook
  2. LinkedIn Corp (NYSE:LNKD): Bought by Microsoft Corporation (NASDAQ:MSFT) after losing $166.14 million in 2015
  3. Twitter Inc (NYSE:TWTR): Increasing losses, flat user growth, crashing stock price
  4. Tumblr: Bought by Yahoo! Inc. (NASDAQ:YHOO) as a speculative play, but did nothing
  5. Instagram: Bought by Facebook for $1.1 billion

None of these competitors amounted to much.

Instagram came the closest to threatening Facebook, which is why Facebook coughed up more than a billion dollars for it. This was a big win for Instagram, since there were only 13 employees at that time. Needless to say, they got extremely rich through the Facebook acquisition.

Analysts were less happy about the deal. Facebook was on the verge of its initial public offering at the time, so naturally investors didn’t take too kindly to the sudden cash expenditure. But they got over it, because Facebook oozes profits.

The year FB stock appeared on the NASDAQ stock exchange, it delivered $1.5 billion in profits. Compare that to the recent Snapchat earnings, in which Snap reported a $2.21-billion loss for the first quarter of 2017. (Source: “Snap Inc. Reports First Quarter 2017 Results,” Snap Inc, May 10, 2017.)

What a sham.

About 91% of that loss comes from stock-based compensation that Snap doled out to its employees. Great. They got money for losing shareholder money. What a perfect system—how did no one ever think of that before?

The SNAP IPO Timing Was Suspect

Why do companies go public?

Most investors have no idea. Making money is difficult enough without having to plunge into the “why” of it. However, there is an important insight in the answer, so perhaps it’s worth the trouble.

If you ask financial experts, most will repeat the standard line:

“Companies go public to finance their expansion. They gain a wider cross-section of investors, which helps them raise money and invest in growing the business.”

Thank you, Captain Obvious.

That’s a decent enough answer–if you’re reading a textbook. But this is the real world, with real people, and real power. Decisions in the real world are Machiavellian, not idealistic, so it’s more likely that Snapchat timed its IPO at the top of a bubble. A Snapchat bubble.

Think about it: rumors of an IPO plagued Evan Spiegel as he crisscrossed the country for investor meetings. Advertisers were foaming at the mouth for Snapchat’s coveted 18-to-35-year-old demographic. The company even introduced a new piece of hardware, “Spectacles,” although it was only a limited release.

As Matt Levine of Bloomberg puts it:

“If for instance you are a social media startup, and Facebook Inc. is angling to kill you, and you are in that sweet spot after ‘so important that Facebook is obsessed with you’ and before ‘Facebook has killed you,’ then that is maybe a good time to go public.”

(Source: “Snap Earnings and Emissions Fraud,” Bloomberg, May 11, 2017.)

I couldn’t agree more. The Snapchat IPO was sandwiched too conveniently for me to ignore. It came at exactly the right time for insiders to get rich. We know that Snap spent an extraordinary amount of money on stock-based compensations during the first few months of the year, which only strengthens my suspicions.

But in case you’re more forgiving than me, here are a few more facts to shock you back into reality:

  • The Snapchat founders sold $272.0 million each during the IPO
  • Employees got $750.0 million as a reward for the IPO
  • The extra stock compensation dropped Snap’s margins to -1,479%
  • Even adjusting for the stock as a one-time thing, Snap still burned $188.0 million in three months

By contrast, Facebook was making $1.5 billion in profits the year it went public.

So forgive me if I’m a little shocked by the comparison. Facebook vs. Snapchat…we might as well start comparing the local burger joint to McDonald’s Corporation (NYSE:MCD), or a halfway decent garage band to The Beatles.

Was the Snap IPO Price a High Point?

Before retail investors could trade SNAP stock, institutional investors got a chance to buy the stock. That’s how IPOs work. Wall Street gets a head start on the rest of us, and for no other reason than they’re bigger.

Here’s how it works.

CEO Evan Spiegel meets with Wall Street power players. He negotiates a discounted IPO price with them. They buy up shares of Snapchat stock at this discounted price, waiting for the moment the stock appears on the exchange, because they know retail investors want a piece of the action.

What happens next? Since a picture tells a thousand words, I’ll let this chart do the talking.

SNAP stock chart

Chart courtesy of StockCharts.com

That was the first day of Snapchat stock’s existence on the stock market.

Investors were extremely bullish on Snapchat stock during those early days, though I cannot tell you why. It couldn’t have been for the company’s user growth, nor its bottom line. So I have to assume that revenues jumping 589% year-over-year is what drove them into a frenzy.

But, of course, that enthusiasm didn’t last. The market always moves back towards reality at some point. And the reality was that Snapchat was facing “increased competition.” Guess who from?

Facebook, of course.

Without any shame at all, Facebook simply copied “Snapchat’s” most popular features and pasted them into “Instagram.” Users were suddenly able to send short videos and pictures (overlaid with filters) to each other. They could also create “Moments” that looked a heck of a lot like Snapchat’s “Stories.”

It was a blatant rip-off, but I’m not sure that Instagram users care all that much.

Facebook repeated this move by adding Snapchat-inspired features to “WhatsApp” and its marquee service: “Facebook.” These aggressive counter-attacks seem to be slowing Snapchat user growth, which was terribly disappointing this quarter.

This is what happened to SNAP stock price as a result:

SNAP stock price

Chart courtesy of StockCharts.com

You live by investor sentiment, you die by it. That’s what this chart is screaming, loud and clear. But before I give Snapchat stock its final words, let’s take a deeper look at the rift between Facebook-the-company and Snap-Inc-the-company.

Why Is Facebook Superior to Snapchat?

It’s safe to say that SNAP stock skyrocketed on investor enthusiasm alone. It’s not like there was any material proof that Snapchat was going to be as successful as Facebook. We literally had evidence to the contrary.

Even if you got past the profit gap between Facebook and Snapchat (at the time they went public), there were other reasons to be pessimistic on Snap stock.

For instance, when Facebook went public, its user count was three times the size of Snapchat’s service, and an outlier in the overall trend. Facebook was generally adding lots of new subscribers as well.

Snapchat appears headed in the opposite direction. It’s still adding new users every quarter, but the amount it’s adding to that new pile is getting smaller each year. These numbers were right in the Snapchat IPO filings.

Investors could, and certainly did, ignore them, albeit at their own peril.

Sure enough, Snap’s first earnings report was a disaster. The company only moved from 158 million users to 166 million users, which is not what anyone in their right mind would call “Facebook-level growth.”

Worse still, the cost per user rose to $0.60 from $0.52 a year before. (Source: Snap Inc, op cit.)

That’s not what you want to see! Companies are supposed to get more efficient with their costs as they grow! It’s called economies of scale, for goodness’ sake!

Pardon my exuberance, but it just upsets me that people are comparing Snapchat to Facebook. It means that they don’t really appreciate how rare FB stock truly is.

Investments like that don’t come along very often. Until the rise of Uber Technologies, Inc., Facebook held the record as the biggest startup of all time. Then it went public in one of the most high-profile IPOs of all time. Huge valuation, big expectations.

Yet Facebook surpassed them all. How is it that a tightly watched stock can yield 292.45%? It’s not like Facebook accumulated those gains over a decade. We’re talking about a five-year span! FB stock nearly quadrupled in just five years.

Conclusion: Will Facebook Crush Snapchat?

Some of you may not be aware that Mark Zuckerberg offered to buy Snapchat.

He reportedly put up $3.0 billion, but Evan Spiegel refused the offer. It’s obvious that Spiegel wants to rule Snapchat as a little fiefdom, like Zuckerberg rules Facebook. But not everyone can be like Zuckerberg.

He is equal parts visionary and ruthless CEO. You can see it in the decisions he makes. For instance, there was nothing idealistic about copying Snapchat’s features the way he did. It was cold and calculated…and I mean that in the best way possible. It’s an old trick of warfare: the carrot and the stick.

Whenever possible, you forestall a competitor by offering them a carrot (in this case, Facebook’s acquisition offer). Instagram took the carrot, and so did Whatsapp. Their founders got rich, their user bases doubled, and Facebook kept its stranglehold on the social media world.

But when the carrot is refused, as in the case of Snapchat, you have to bring out the stick. Zuckerberg has shown a willingness to pummel Snapchat into submission, so I give him an edge in the “Facebook vs. Snapchat stock” standoff.

It seems likely that Facebook will crush Snapchat in the coming years.