Is This The Hottest Social Media Stock of 2017?

Since Facebook’s initial public offering (IPO) in 2012, Mark Zuckerberg company shares have become the hottest thing on Wall Street almost tripling in value. But now, Facebook is facing the ultimate challenger: SNAP Inc. the maker of “Snapchat,” the popular video messaging service that is probably keeping Facebook CEO Mark Zuckerberg awake at night. It’s hard to blame him; the Snapchat user growth statistics have been frightening- boasting 158 million daily users and an average of 2.5 billion “snaps” created on every day by the end of 2016.

The most highly anticipated IPO of the year finally has a date set to begin trading. SNAP (NYSE:SNAP) will price its shares on March 1 2017 post market hours, which means investors should be able to buy shares on March 2, after which these two social media stocks may be set to collide. Many pro-Facebook analysts are concerned about the Snapchat IPO, because it could potentially harm FB stock.

Why? Snapchat’s users are younger, more active, and more responsive to ads according to the IPO papers. Furthermore what investors saw was a company with remarkable growth; the SNAP IPO papers revealed revenue growth in the high-triple digits and intense engagement by users creating a buzz that SNAP stock could soar after the Snapchat IPO.


It’s easy to understand why investors compare the two firms; both founders dropped out of college to build their own companies, both turned down billion dollar offers to sell their companies at an early stage and both became billionaires before the age of 25. And even with an amendment to the initial SEC filing, lowering the company’s valuation to a range of between $19.5 billion and $22.2 billion (or $14 to $16 per share), the SNAP IPO is set to become the third-largest tech IPO of all time, behind only Facebook and Alibaba.

So, should we all be stacking up on SNAP stock? On one hand, if this comparison (SNAP vs. Facebook) holds true after the Snapchat IPO, early investors in SNAP stock will make a fortune. On the other hand, despite Snapchat’s 158 million daily active users, SNAP reported growing revenues but also increasing losses. SNAP recorded $404.5 million in revenue in 2016, compared with $58.7 million in 2015. Net losses grew to $514.6 million in 2016, compared with a net loss of $372.9 million in 2015. Like many burgeoning tech startups, Snap warned that it may never achieve or maintain profitability.

“We generate revenue primarily through advertising,” wrote SNAP in its IPO filing. This business model should look familiar. It’s pretty much what Facebook and Google (now Alphabet Inc (NASDAQ:GOOG)) have been doing for years. Even now, five years after entering the stock market, Facebook generates nearly 98% of its revenues from advertising.


Snapchat is trying to do the same thing. It is working with publishers to make more and more content to entertain users. It seems to be working, because users open the app an average of 18 times a day. They also spend between 25 and 30 minutes using the app every day. Better still, there are studies that show 88% of Snapchat users are in the advertisers demographic sweet spot of 13 to 34.

And even though many analysts remain divided on SNAP’s financial future, it turns out there is plenty of information that can help forecast the potential of SNAP stock.

For instance, Snap revenues increased 589% between 2015 and 2016. It sold $404.5 million worth of advertising space last year, a startling sum considering that only a handful of publishers are making content for Snapchat. But can it keep up that growth?

It’s hard to say. Snapchat is pretty far away from making profits, and its IPO documents show that profits may not even be a priority for the firm. Based on certain lines in the S-1, Snap’s executives seem to think they can keep investors happy by continuing to grow.


But that doesn’t answer the question: Should you invest in SNAP stock?

Good companies don’t necessarily make for great investments, and vice versa, so that question is still open. Stock prices move for all sorts of different reasons, and the trick is to find stocks that are trading at a discount, and SNAP’s IPO pricing is fairly attractive.

Snap may not be equal to Facebook as a business, but SNAP stock could potentially outperform FB stock in 2017. It has a novelty factor, for one thing. But there’s more. Snapchat is still experiencing rapid-fire growth—the kind normally experienced before startups go public. This means that retail investors are getting a unique opportunity. This is an early entry point to one of the most exciting companies on the planet, and at a relatively low valuation too.

Advertising spending is set to increase to $767 billion by 2020. Better still, mobile advertising is expected to triple by then, meaning that the entire pie is growing. Both Facebook stock and Snap stock can succeed; they don’t need to steal slices of market share from each other. So while we remain skeptical that Snapchat poses a threat to FB stock, we do believe that it is a promising investment.