Better Investment, Facebook or Snapchat
The Current Conversation
A lot of analysts and investors are starting to say that Snapchat is taking focus in the teen-25 age group of the world. Which I honestly can not deny. I am a 25 year old and I used Snapchat pretty heavily for the last couple of years. The reason why it is so useful and I believe it is so great for teen-25 age group is because in this age group there is more content. What I mean by that is this age group is a lot more active and they want to show off what they are doing all the time. Which is completely normal, I used to do it all the time. Instagram (also owned by Facebook) and Facebook, I like to think of as more of a quality place to post your experiences. And I believe this is why they grab the attention of people older than 25. This is basic information if you follow these two companies, but the question is, does it matter that Snapchat grabs the attention of teen-25 year old people? In the financial world, this is the wrong target audience to attract and I think Facebook and Mark Zuckerburg have found this out not to long ago. Let me explain why in the next section.
FB vs SNAP
Why Snapchats Focus is Wrong Long Term... Financially
Look, Snapchat is a very successful company. The owners have built a company worth over 22 billion dollars! This is extreme success if you ask me. But do they deserve to be in the same conversation as a Google or a Facebook? The answer is simply no. If you did not know, Facebook's market cap is currently 512 billion dollars. That means Facebook could eat Snap Chat 23 times before it got full. Now although this was not the point of the conversation, I just wanted to give you an idea of how these companies stack up.
So why is snap chat's focus wrong? Well, if you put the numbers aside and just think of human behavior it can be eye opening. Listen to this statistic, the age group that spends the most money around the world (not just in the US) is 35-44 years old. Now, listen to this, Facebook tends to target the ages 25-54 which is almost 40% of their entire community. This is not a coincidence...
Why Does Age Matter? What does age mean for their Financials?
The age of the target audience for a company can literally determine the long term growth of a company. We will see this as the future plays out for both companies, but I think you can get an idea of what Facebook is doing, given there target audience and their revenue/profit.
Online social media sites/apps like Facebook, Twitter, Instagram, and Snapchat make most of all their revenue, like 90%+ of their revenue, from one thing. This one thing is ad space.
The number one question is, how do ads create money for a company? Well, I actually worked for 2 advertising companies before I got hired by the Big 4 to do finance work and I learned a lot in my first two roles. All advertisers care about is ratios. They look at historical ratios for similar products on different platforms. They do not care what the name of company is or if they use it at all. They want to see results! As so would any company advertising. Think about it, if you are going to spend money marketing, it better work!
Facebook destroys the competition with ratios and conversions because they have people coming to their site and apps that are ready to spend money. A perfect example I like to think about is my old boss. She is about 40 years old with 2 kids. She constantly uses Amazon and Facebook. She would search things on Amazon, she would put it in her cart, and then not buy it that day (as most of us do). And then she would go on Facebook the next day, see an ad for exactly what she searched for (I am sure this has happened to all of us) and she would click on the ad. Right there, FB got a click on an ad and increased their click ratio. Then lets say she has something in her cart after she clicked on the ad and actually bought something. This ad impression led to a buy from Facebook's ad. Boom, right there is the gold! This would increase their conversion ratio and will drive up Facebook's metrics. With better ratios and better conversions Facebook can then charge more money for their ad space. This is why a whopping quarter of ad space in the US is bought on FB! Not only is FB selling a bunch of Ad space but because their metrics in advertising continue to grow and grow, they continually charge more. FB is already a large company and they plan on charging 43% more for their ad space next year. This is because of one reason, their ad space actually works and marketers and advertisers are willing to spend on their sites/applications.
Now, lets take a dive into Snapchat. Snapchat's target users are not buying things at the same rate as Facebook's target users. They are not shopping on amazon or other online stores for home appliances, home decor, furniture, paper towels, ect. Which means they are not getting great click rates or great conversion rates. This drastically lowers there ad space revenue because they can not get as good of a bang for their buck per ad. I used Snapchat for years and not once did I ever click on an add as a 23-25 year old and if I saw a video for an add I would skip through it because I simply did not care for it. I was not ready to spend my money right there and then. Now this is my personal experience, but I know I am not the only teen-early twenty year old skipping through adds about Hello-Fresh. My Mom cooked for me every night!
Can Snap Chat Change Their Focus?
Of Course! But this would take drastic changes to their application and could take years. That being said, it may not even be successful.
The reason I say of course is because Facebook did this. Facebook and Instagram used to be a place where only the young would be (teen-25 years old). But, they changed their focus and adjusted their site a couple of times throughout the last 5 years. They have now captured the audience where all the money is. Do you think this was just a coincidence? I do not believe so.
Facebook has highly intelligent individuals not only in the technology space, but they are pretty savvy on the financial side of things also.
How to Trade Both Stocks
Now, I think financially it is a no brainier right now that FB is the more stable of the two. They have a much larger audience (over 2 billion people!) and they have proven over and over again every earnings report that they have no intentions of slowing down.
I would want some exposure to Snapchat though. Snap chat could eventually figure this whole game out and begin to make the changes they need to in order to grow. Just this last week they have changed there app and even though a lot of people do not like the change this should be taken with a grain of salt. The reason is because FB got a lot of backlash for all their changes in the past and the reason is simply because people do not like change. I think things have worked out pretty nicely for the social media Giant after these changes and I do not doubt Snapchat will continue to see growth as well.
Facebook in the Beginning
I am not sure if a lot of you remember but FB, like Snapchat had struggled in the beginning stages of their life in the stock market. They had their ups and downs which was concerning but they eventually started climbing and never looked back from there. There were many concerns as to China not accepting them, growth at the older age (laughable now), Google swallowing them whole in the ad space competition, and of course the fear that it was just another Myspace.
Snap Chat has a bright future but first they have to show the financial world that they can actually produce a profit. I think one of the biggest differences about the early stages of FB compared to SNAP is FB was making a profit right out of the gate! It was more of a concern that they were going to die off very quickly rather then be profitable. Which I believe is still a fear today for FB by many investors considering the forward PE on the stock is 19! Talk about a bargain in the stock market. The sell off last week obviously helped accomplish this discount
That being said, I would not give up hope on Snapchat's growth but they will have to start making changes to get where they need to go.
Long Term Poll
What is a better long term investment?
Do you use Facebook or Instagram Daily?
© 2018 David Flores