Stocks

Snap Inc Shares Rise As Teen Facebook Users Migrate To Snapchat

Investors who have held Facebook shares for years are probably well-accustomed to concerns that the social network is falling out of favor among teens, which date back years, but these concerns have resurfaced this week. One firm predicts that for the second year in a row, this key demographic of Facebook users may actually cut back their usage of the social network in favor of the photo-centric platforms Instagram and Snapchat.

Meanwhile, the lead underwriter for Snap’s IPO has again slashed its price target, and another firm has initiated coverage of Facebook, Snap and Twitter, declaring one network “king of the social web.” Engagement seems to be falling by the wayside in favor of revenue growth.

facebook users
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Will Snap finally have its day?

eMarketer is predicting that Facebook users in the U.S. who are aged between 12 and 24 might cut back the amount of time they spend on the social network or even abandon it altogether. The firm is calling for a 3.4% year-over-year decline in Facebook users aged 12 to 17. In 2016, the monthly user base in this age group declined 1.2% year over year.

Analysts at eMarketer said they’ve observed teens and tweens migrating from Facebook to Snapchat and Instagram because they are more visually focused. And the current Facebook users in these age groups are engaging with the social network less and less, they add. Additionally, they’re starting to see young people they call “Facebook-nevers,” which are children entering the tween years who are simply skipping over Facebook but using Instagram.

The firm has increased its estimates for Snapchat’s user growth to be in line with the data reported by the company. eMarketer now looks for Snapchat’s U.S. user base to grow by 25.8% to 79.2 million monthly users. The firm sees Facebook as being “fortunate that it owns Instagram” because the photo-sharing platform is popular among teens. eMarketer predicts that Instagram’s U.S. user base will increase 23.8% to 85.5 million.

Bullish on Snap, but not now

SunTrust Robinson Humphrey analyst Youssef Squali initiated coverage of Facebook, Snap and Twitter last week, and he rates Snap as a Sell with a $10 price target, declaring that the company has “further to fall.”

Despite the Sell rating and $10 price target, he sounds quite bullish on the Snapchat parent, but he emphasized that this is in the long term. He sees downside risk to the already-reduced consensus estimates for fiscal 2017 and 2018. He warned that the self-serve and programmatic ad platforms are growing ad volumes but slashing ad pricing, which he said will be a near-term headwind for revenue.

He described Snap as a “great story telling platform” but not yet a “must-buy for advertisers.” At $10, Squali’s price target is even further below Morgan Stanley’s new price target. The firm slashed its target from $16 to $14 in what’s now the second price target cut since the initial public offering earlier this year.

Snap shares rallied on Tuesday and Wednesday after the eMarketer report emphasized Snapchat’s strong future and declining teen and tween Facebook users. The stock rose more than 3% on Wednesday, reaching as high as $15.13, although it remains stubbornly below the $17 IPO price.

Facebook still king of the roost

Unsurprisingly, Squali initiated coverage of Facebook with a Buy rating and tacked on an ultra-bullish $210 price target. He cited the massive scale of the company’s many social media platforms, which he says have connected about 70% of all global Internet users. Because of this massive scale, he feels that Facebook has a “defensible position that is hard to replicate.”

He didn’t really have anything bad to say about Facebook, but his initiation of Snap indicates that his views are all about the immediate present. If younger Facebook users really do abandon the platform, the company’s future could be in jeopardy, although the company has made it clear that it has no qualms about copying every unique feature Snap comes up with. Thus, Facebook will indeed be a tough nut for Snap to crack, especially if it can’t convince advertisers to spend on its platform.

Squali’s big issue with Snap seems to be all about the lack of revenue backing up the engagement, so management would do well to get its story straight and figure out the best way to convince advertisers to spend with them.