Facebook vs. Snapchat: It’s Not Even Close…

All hail Mark Zuckerberg, king of social media!

King Zuck’s international repository for washed up memes and abhorrent political rants – better known as Facebook (NASDAQ:FB) – has just buried another so-called competitor.

The best part? Facebook didn’t even need to work for its latest victory. Zuck simply implemented his competitor’s ideas, stepped back, and watched the market newcomer fall to pieces.

That competitor is Snap Inc. (NYSE:SNAP). Snap just listed its shares on the New York Stock Exchange in March. But after last night’s earnings report, management might be second guessing its decision to go public.

More on this earnings dud in just a minute. Before we get into the sordid details, I want to show you how Facebook squashed Snapchat long before last night’s disastrous earnings release.

First, a history lesson…

Zuckerberg offered Snap CEO Evan Spiegel $3 billion to buy out his company way back in 2013. Spiegel refused. Ever since, Facebook has worked to imitate Snapchat features across its various platforms, Business Insider notes.

“Facebook finally found success with Instagram Stories — a blatant copy of Snapchat Stories — which quickly amassed hundreds of millions of daily users in a matter of months,” Business Insider reports. “It quickly spread the format to its other big apps — Facebook, Messenger, and WhatsApp.”

The results speak for themselves. Facebook bought Instagram for a cool $1 billion in 2012. Thanks to successful new features like Instagram Stories, the app now boasts 200 million daily active users. That’s makes Instagram bigger than Snapchat.

Which brings us to last night’s disastrous earnings report.

Despite revealing a bunch of new features like emoji pens and a loop tool this week, actual earnings data couldn’t save the hip kids over at Snap HQ.

Keep in mind, Snap isn’t exactly a value play. Investors were looking for breakneck growth. In the social media world, that means more users. That’s why Snap failed its first test as a public company in spectacular fashion. As a brand new stock, investors wanted proof that the company was still putting up crazy growth numbers.

But growth is already slowing for Snap. The app added 8 million new daily users during the first quarter. That’s a year-over-year growth rate of 36%. At this time last year, Business Insider notes that Snapchat was growing its daily average users by 52%.

Snap shares are down more than 20% in pre-market trading. Just as the IPO market is starting to come out of hibernation, SNAP is cracking in two.

Sorry, millennials. Your hot new stock just took a long walk off a short pier.

Snap Tweet

Remember, SNAP traded nearly 50% above its initial pricing back in March even as an analyst slapped the stock with a downgrade right out of the gate. A dismal price target of $10 per share didn’t deter a single speculator.

Never mind that no one older than 25 can give me a clear explanation as to how Snapchat operates or why it’s so popular. Everyone wants a piece of the action. When Snap first began trading less than three months ago, its stock was worth three Twitters. After SNAP’s first day on the market, its market value jumped by almost $9 billion.

That’s why we left SNAP to the gamblers. IPOs are one of the trickier trades on the market. It’s tempting to take a huge hack at them right when they begin trading– especially when you’re dealing with a hot name like SNAP. Sometimes it pays off, and other times you might get burned.

Remember, most IPOs are just cash grabs for up-and-coming companies and underwriters – especially in trendy sectors and industries. Some young traders just learned this lesson the hard way.

If Snap does eventually offer us a profitable trading setup, you’ll be the first to know. But for now, this stock is stuck in purgatory. Avoid it at all costs. Facebook continues to grind its competitors to dust. Snapchat’s not ready to compete with the king just yet…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning