Snap stock is falling for a second day despite calls from the underwriters of its initial public offering to buy it. On Tuesday, Facebook revealed the next set of tools in what looks like an effort to transform itself into Snap, and some analysts are convinced that the much bigger social media firm will continue to chase the Snapchat parent in innovation.
However, Snapchat’s hard-to-reach user base isn’t worth anything if those users don’t look at the section of the app where all the ads are, which one bear is suggesting. This has bad implications for Snap stock, although perhaps not right now.
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Tossing encouragement Snap’s way
In a research note dated March 28, Jefferies analyst Brian Fitzgerald weighed in on Facebook Camera and Stories, and he said Snap is still the “lead innovator” while Facebook is just “playing catch up.” Let’s not forget that this analyst probably also raves about Facebook in his notes about it, so it will be interesting to see what he has to say about Mark Zuckerberg’s company the next time he issues a research note on it.
At any rate, Jefferies has a Buy rating and bullish $30 price target on Snap stock right now. Fitzgerald said Facebook is now trying to “crack the code” behind the company’s high engagement by “imitating core functionality,” referencing the new in-app camera, disappearing Stories and Direct messages and new filters and effects for photos.
Facebook is chasing Snap
The social network added these features to its core app on Tuesday after integrating them into WhatsApp and Instagram some time ago. As a result, it really comes as no surprise that these Snapchat-like features have made their way to the social media firm’s core app, especially since we heard recently that it was testing them.
Fitzgerald feels that Facebook’s copying of Snap’s main features demonstrates that it is creating the “best and most engaging tool sets.” He also said he sees Facebook as “chasing Snap’s innovation as a way to spur users to share more often.” He particularly likes the company’s pace of innovation and feels that products like Spectacles demonstrate that it’s willing to “think outside the box to drive the user experience.”
Big runway for monetization
Morgan Stanley analyst Brian Nowak highlighted the long runway for monetization in a research note dated March 28. He initiated coverage of Snap stock this week with an Overweight rating and $28 price target, pointing out that Snap’s user base mostly consists of highly-engaged, difficult-to-reach Millennials. Nowak believes that there is demand for the company’s Millennial audience and “differentiated online video ad inventory” among advertisers.
He also estimates that it is monetizing at just one-fiftieth the rate of Facebook, as last year Snap’s ad load stood at 0.6 ads per daily active user per hour, compared to about 50 for the core Facebook mobile app, 100 for Twitter and 7 for Instagram. As advertiser demand grows, Nowak expects Snap’s ad load to rise to 8 ads per daily active user per hour by 2020.
He notes that this doesn’t sound like much over three years, but he also pointed out that most of the time spent on Snap is focused on chatting and messaging, which he feels doesn’t have as much monetization potential as other functions of social media.
Not all Snap stock coverage is bullish
Right after the IPO, the bears dominated coverage of Snap stock with most analysts calling out the decelerating user growth, lack of voting rights, and other problems with the Snapchat parent. Then this week, the floodgates of bullish coverage were opened with the closure of the blackout window for the IPO underwriters. However, there are still some bears speaking up.
Moffett-Nathanson’s Michael Nathanson has a Sell rating on Snap stock, and in his research note, he called out one of the same things Nowak mentioned, which was that most usage of the platform is for chatting and messaging. However, given Nathanson’s bearish stance, he didn’t hesitate to call this out as a bad thing, unlike Nowak.
Bad implications for Snap stock
According to Barron’s, his note hinges on a focus group of middle school-aged children. He called the company a “middle-school crush” and said the primary functionality they use Snapchat for is messaging. Nowak pointed out that there isn’t as much monetization potential in this aspect of social media, and Nathanson explained why that is. He said it’s because this age group doesn’t spend much time looking at the app’s Discover section, which is probably where the ads are. He added that high school students also use Snap, but again, they don’t look at the section where the ads are.
So the long-term question is whether that hard-to-reach user base is really worth anything if they’re not looking at the section of the app where the ads are. Advertisers may be chomping at the bit to advertise in the app for now, but when they start to realize that their ads aren’t having any impact, they’re not going to keep advertising. Needless to say, this probably means bad things for Snap stock in the long run.
Snap stock fell by as much as 1.08% to $21.97 during regular trading hours on Wednesday.