Ultimately, the direct and indirect challenges posed by Mark Zuckerberg's company are unlikely to doom the Snapchat parent, which still has a very loyal core base of younger U.S. and European consumers. But when combined with Snap's challenging cost structure, they make its stock a risky bet even at current depressed levels.
The Snapkit Platform
Snap's reported plans to create a developer platform for third-party mobile apps serve as one more example of an offering from the company that's intriguing at first glance, but which Facebook might have little trouble one-upping. According to a Tuesday TechCrunch report, the developer platform will be called Snapkit, let users log into third-party apps with their Snapchat credentials and (most importantly) use Snapchat's camera feature within other apps.
The camera feature has evolved a lot since Snapchat's early days: It now supports a wide variety of filters, lenses and editing tools -- including sponsored filters/lenses that are purchased by advertisers -- that can be used to enhance both selfies and rear-camera photos and videos. Users relying on the camera within third-party apps would reportedly be able to either use the photos and videos they create inside the app or send them to the Snapchat app for sharing.
The platform could conceivably provide a lift to Snap's ad business, while also boosting Snapchat's user engagement rates. Enthusiasm about the platform, and perhaps also CEO Evan Spiegel's remarks at the Code Conference, might be giving a lift to Snap's beaten-up shares, which rose about 4% Wednesday.
How Facebook Could Counter
There's only one problem with Snapkit: Facebook launched a developer platform for the camera feature within its core app in the spring of 2017 -- it's called Camera Effects -- and about a month ago announced the platform would be extended to Instagram and Facebook Messenger.
There's no reason why Facebook, whose global daily active user (DAU) base is more than seven times larger than Snap's, couldn't take things a step farther and make Camera Effects available to third-party apps. Especially since the company recently announced that third-party apps will be able to share content such as music and recorded video to the core Facebook app and Instagram; GoPro (GPRO) and Spotify (SPOT) are among the initial supporters of the feature.
One Facebook Counterattack After Another
Facebook, of course, has already launched a slew of clones for Snapchat's popular and well-monetized Stories feature -- two of them, Instagram Stories and WhatsApp Status, now easily claim more DAUs than Snapchat does overall. It has also rolled out Snapchat-like lenses, filters and stickers for its cameras, and added support for disappearing messages within its apps. In addition, as Snapchat sees some traction for the short-length original shows being developed for its Discover platform, Facebook is investing in building up its own library of originals via its Watch video platform.
Not all of Facebook's attempts to compete with (if not fully copy) Snapchat yield hits -- for example, the ephemeral (disappearing) messaging services it has launched don't seem to have the kind of traction that Snapchat's messaging services maintain. However, together with Snapchat's unconventional interface, they are serving to keep a lid on Snap's addressable market. Just as Facebook's ad business, with its superior scale and targeting/measurement abilities, continues pressuring Snap's top line.
And given that there's no sign that Snap is ready to make legal or regulatory challenges to Facebook's copying, never mind carrying out such challenges successfully, any enthusiasm about an innovative new service or compelling business initiative launched by Snap needs to be balanced by the risk that Facebook will make a copycat move.
The Big Picture
It's hard to ignore such long-term headwinds to Snap's growth story when its stock, though hammered in early May following a disappointing Q1 report and 35% below its early-2017 IPO price, still trades for 8 times a 2019 sales consensus of $1.7 billion.
That's a healthy multiple for a company whose revenue growth has begun decelerating meaningfully, and which isn't expected by analysts to become cash-flow positive until 2021. Particularly since Snap's margins will continue to be pressured by the fact that (unlike Facebook and other Internet giants) it relies on third-party cloud infrastructures to store and deliver its content to users, rather than its own data centers.As is the case for Twitter ( TWTR) , Snap's M&A potential arguably warrants some kind of valuation premium. However, if valued strictly based on the potential future profitability of its business, Snap still looks richly-priced in light of all the pressure Zuckerberg & Co. can be expected to keep bringing to bear.