With Snapchat leaking that the company is planning a quick initial public offering (IPO) at a $25 billion valuation, the real motivation for speeding up the deal may be the ability of Instagram Stories to grow to from scratch to 60 percent of Snapchat’s user base in just 10 weeks.
L&F Capital Management suggests that Snapchat’s current advantages are easily replicated, and that “Instagram will ultimately consolidate the teen user base.”
They see a Snapchat IPO as another one-trick-pony like GoPro (NASDAQ:GPRO), Fitbit (NYSE:FIT) and Shake Shack (NYSE:SHAK). All three had hot IPO’s and a big jump in price in the first few days of trading. But within a year, competition swooped in and the companies’ stock prices crumbled.
A recent Wishbone survey targeting 35,000 Snapchat users between the ages of 12 and 25 found the company’s primary competitive advantage is its filters. Geo filters and puppy dog faces are what the youth demographic currently wants for viral “fun.” But the survey also revealed that if Facebook had Snapchat-type filters, it would take market share from Snapchat’s 12 to 25-age demographic.
Facebook (NASDAQ:FB) Instagram Stories launched on August 2, and already has 100 million daily active viewers, compared to Snapchat’s 150 million users after almost five years. A big part of Instagram Stories’ rapid adoption has probably been due to “immersion” within the 500 million users in Instagram’s ecosystem.
L&F is confident that Facebook can continue to grow its earnings by 30 percent compounded, because the falling “Cost per Engagement” for the Instagram and Facebook platform is a magnet for advertiser dollars and an impediment for other social media platforms.
Snapchat is the primary target in the Facebook’s app consolidation plans. By knocking off Snapchat’s core features, Facebook will strengthen its user base and take share in the youth demographic, where advertisers desperately want to increase engagement.
Snapchat currently has an advantage when it comes to private direct messaging, but that feature is easily imitated. Facebook is already testing a similar tool with Messenger. By enabling short-lived direct messaging text, photos and videos, Messenger would seem to be a huge threat to Snapchat’s value proposition to users.
Instagram Stories already addresses the public messaging components, and when combined with Facebook Messenger features, it could also offer the kid-targeted private component.
L&F believes that with all the hype around Snapchat, the stock price will undoubtedly jump after the IPO. But it also expects Snapchat to be “butchered” as reality sinks in that the company does not have “protectable” value.