Snap May Not Face An Existential Threat Despite Facebook’s Fast-Follower Strategy

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Facebook (NASDAQ:FB) recently updated its Instagram app to add a new Face Filters feature, which is much like Snap‘s (NYSE:SNAP) immensely popular Lenses tool. With its latest move, Facebook has effectively replicated Snap’s entire photo sharing/camera experience – ranging from Stories to the original ephemeral messaging  – across its various digital properties, which have over 2 billion users. The fast-follower strategy has been yielding significant results for Facebook.  For instance, the Instagram Stories feature reached about 200 million daily active users in less than a year post-launch, well ahead of Snap’s total user base. Now that Facebook appears to have largely deconstructed Snapchat’s features, how will Snap compete against the social media behemoth, given its significantly larger platform and its huge financial and technology resources?

Trefis has a $17 price estimate for Snap, which is around 20% below the current market price.

See Our Full Model And Analysis For Snap Here

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Snap’s Platform Growth Will Slow, But We Don’t See An Existential Threat 

Platforms and user bases remain paramount in the Internet era, and Facebook’s moves to replicate Snapchat’s best features will certainly slow down the growth of Snap’s platform. For instance, in international markets, where Facebook and its properties are deeply entrenched, users may have less incentive to sign up for Snapchat. Facebook’s moves could also reduce Snap’s ability to expand beyond its core demographic of 18 to 35 year olds in developed markets.

That said, we do not believe that Facebook’s moves will pose an existential threat to Snap, which could shape itself into a more niche platform targeted at younger users. Snapchat continues to have a relatively unique user base, reaching a large portion of users that aren’t active on Facebook. For instance, around 35% of Snapchat’s users cannot be reached by Facebook and ~46% can’t be reached by Instagram. Snap also focuses on its users forming closer, higher-quality connections unlike Facebook and Twitter, where users often interact with acquaintances and the broader public. This could reinforce the stickiness of the platform.

The user bases of social media properties often tend to be geographically concentrated (WeChat in China, BBM in Indonesia) and Snap is strongest in the U.S. and European markets among younger users. A majority of Americans between the ages 13 to 34 with smartphones use Snapchat. This should still prove lucrative over the long term, as mobile ad spending in the United States is projected to stand at $88.8 billion in 2020, per IDC, a sum which is more than the next nine top ad markets combined.

Snap May Still Have An Innovation Edge

Snap has demonstrated that it understands the millennial demographic – a highly sought-after demographic for advertisers – better than most other Internet companies. This could allow it stay ahead of the curve with interesting features to keep its smaller, but valuable, user base hooked. Despite Facebook’s onslaught, engagement levels on Snap’s platform have been on the rise, with the company indicating that people were spending over 30 minutes on the app during Q1’17, compared to the 25 to 30 minutes it highlighted on its Form S-1. Users are also creating more Snaps – over 3 billion during Q1’17, compared to over 2.5 billion during Q3’16. Snap has also been very creative on the advertising front, with quirky, vertical video-based ad products that are engaging and don’t necessarily feel like interruptions for users. Snap has also been taking a leaf out of its larger rival’s book, launching a machine learning-based search feature that allows users to search though Stories that are shared with the public – which could further increase time spent on the app – while increasingly moving towards self-serve and programmatic advertising.

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