Cheer Facebook, but Change Could Happen in a 'Snap'

 | Feb 02, 2017 | 10:00 AM EST
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By all indications, Facebook (FB) is crushing it in every single aspect of its business. But CEO Mark Zuckerberg and his fellow shareholders now must be prepared for the one thing that could soon cause the shares to correct.

That's none other than the initial public offering (IPO) of Snap Inc., the disappearing photo app maker with ambitions to also be a consumer-products giant. The basic premise is as follows. Up until now, Action Alerts PLUS holding Facebook has been the only way for Wall Street to successfully play the rising importance of social media in our lives. Zuckerberg has moved lightening quick to move the Facebook user experience forward by implementing live video and better curating the newsfeed. Meanwhile, the innovation on Instagram has continued, too, with the recent addition of the stories function as a means to try and grab Snapchat users. Whereas Twitter (TWTR) has failed at growing its user base and general relevance, Facebook has thrived. 

Insane New Facebook Stats

  • Market Cap: $390 billion
  • Instagram: 400 million daily active users
  • WhatsApp: Over 1.2 billion monthly users

And as a result, Wall Street has cheered all of Facebook's efforts, sending the stock up some 77% over the past two years. Twitter has crashed about 57% during that same time-span.

But now, the arrival of Snapchat soon to the public markets will cause money managers to make a tough decision. Cash out of proven growth story Facebook and pile into the unproven Snap Inc.? Or, sit back and watch Snap Inc. shares go berserk over the next two years while Facebook's tread water as it invests aggressively to support its future ambitions? To be sure, there is very little reason for managers to hold shares in both social media companies as in many respects, they have the exact same business models. If one were to hold onto both, it would create out-sized portfolio risk in one area of tech (aka one would be less diversified).

A test of this thesis could come soon as Snap Inc. will reportedly file its financial results. Once they are released, interested parties could stumble across some impressive numbers that are very Facebook-like. For instance:

  • Over 150 million daily active users
  • Over 300 million monthly active users
  • Over 30% of U.S. millennials access Snapchat regularly
  • There are more than 9,000 snaps (photos) taken every second
  • Over 10 billion video views daily
  • Average amount spent on Snapchat every day: 30 minutes

But on Thursday go ahead and cheer Facebook's dominance, it's well-deserved. However, don't forget about what lies ahead.  

Chart of the Day

Staying on the topic of potentially looming stock crashes, check out the ugly movement in the Dow Transports (dark blue line below) over the last five sessions. The easy scapegoat for the pullback in the transports against the backdrop of decent days for the broader market is weak earnings from UPS (UPS) . But considering Trump Stimulus Trades in building materials such as Vulcan Materials (VMC) and Eagle Materials (EXP) have also retrenched (these are areas that had been leading the market post-election) there may be more behind the fresh move in the Dow Transports.

Count this writer as being in that camp. In addition to Trump showing he will be a loose cannon in office, a lack of color on new fiscal policies, likely upcoming hawkish Fed speeches and disastrous retail earnings, the broader market seems teed up for a brief downdraft this month.    

Wake up transports, please? Source: Yahoo Finance

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